Driving Forces and Financing Trends in the Transportation Sector

There has been an uptick in acquisitions by 3PL companies.

By Peter Lewin

The transportation sector is undergoing a dramatic shift. The intersection of a strong economy and the generational turnover of truck drivers, combined with technology mandates from the federal government, has upended assumptions that have shaped the industry for decades. As these changes reverberate through the industry, they are influencing both the demand for financing and the nature of funding that transportation companies are seeking. One area in which these changes are particularly evident is in third-party logistics (3PL).

Trucking Challenges Have a Ripple Effect

Now in its ninth year, the recovery seems as strong as ever, with freight moving across country at record levels. The relevant economic indicators are quite positive. GDP reached 4.1 percent on an annualized basis in the second quarter of 2018, its fastest pace in four years. The Federal Reserve Board Industrial Production Index rose by 4.2 percent between July 2017 and July 2018, driven by increases in mining and manufacturing. And the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index was 58.1 percent in July, indicating continued growth in the face of uncertainties about tariffs.

This level of economic activity puts freight on the roads. It pushed the Bureau of Transportation Statistics’ Freight Transportation Services Index to a series of all-time highs in the last few months; its 8.2 percent rise over the most recent four quarters was the largest year-over-year increase in eight years. The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index showed almost identical gains. It rose 1.9 percent in July to 115, an 8 percent annual increase.

But at the exact moment that demand is surging, a confluence of demographic factors has limited the ability of trucking companies to keep pace. Long-haul trucking is not for everyone. Drivers can be away from home for days or weeks at a time — and much of that time is spent on their own. As a result, millennials have been hesitant to take the place of baby boomers who are retiring. According to the American Trucking Association, the U.S. faces a shortage of 50,000 drivers.

Compounding this problem is the federal rule mandating the use of electronic logging devices, which by limiting flexibility to respond to traffic, delays at loading docks or limited parking, can lower productivity.

Investment in Technology Driving 3PL Consolidation

Not surprisingly, given ATA’s estimate that trucking represents 70.2 percent of tonnage carried by all modes of domestic freight transportation, the challenges faced by trucking companies have rippled through the transportation sector. This is especially true for 3PL companies. With trucking companies eager to maximize the use of their fleets and shippers worried about securing transportation for their freight, 3PL companies are seeing strong revenue growth. Their principal strategy is to invest heavily in technology to automate the process of pairing shippers with truckers. This investment, in turn, creates an imperative to expand their footprint, enlarge their customer base, and add new market segments. There is a growing recognition among 3PL companies that to maximize their return on their technology investment, they must merge.

M&A Takes Hold Across 3PL

Over the last year, there has been an uptick in acquisitions by 3PL companies. Because the 3PL segment is extremely fragmented, many companies are on the hunt for businesses to fill in their footprint. For instance, this year Sunset Transportation acquired Snowland Freight Services to expand coverage of Sunset’s national network in the upper Midwest. In the third quarter of 2017, C. H. Robinson acquired Milgram & Company, a freight forwarder, customs brokerage and surface transportation firm, expanding its presence in Canada.

Private equity has also seen opportunity in building a 3PL portfolio. To name just a few deals that have occurred since the start of the year, Chicago-based Madison Dearborn Partners has purchased SIRVA, a leading global relocation and moving service provider; funds managed by Stonepeak Partners and D1 Capital Partners acquired a significant minority stake in Lineage Logistics, a provider of temperature-controlled supply chain solutions; and Palm Beach Capital has invested in Need It Now Delivers, which provides same-day ground and air delivery services to a wide range of commercial, industrial and retail customers in the United States. In turn, Need It Now Delivers invested in The Gilbert Company, a leading retail logistics company.

There has also been a growing trend among trucking companies to acquire 3PL companies, both to reduce costs and incorporate their higher margins. In recent months, Chattanooga-based Covenant Transportation Group completed the $83 million acquisition of Landair Holdings, which includes Landair Logistics as well as Landair Transport. Covenant was attracted by the additional systems capabilities of Landair’s managed freight operations. As in the case of 3PL giant Penske Logistics’ purchase of Epes Transportation, these acquisitions can go both ways.

Finding the Right Lender for a 3PL Acquisition

With a strong economy, the factors driving 3PL consolidation will remain strong, but to make the most of its acquisitions, purchasers should be as strategic about selecting their financial partner as they are about choosing their acquisition target. Banks should bring to the table a dedicated team of transportation and logistics industry specialists — on the risk as well as on the origination side — with the experience to appreciate industry dynamics and the authority to ink deals that don’t fit into preordained boxes. Bankers with this level of experience can conduct a more relevant review, make more informed credit decisions, and see opportunities that others might miss.

In addition, the ideal lender should be multifaceted, able to meet the broad spectrum of a 3PL company’s financial needs, whether by offering treasury management services or multi-tranche facilities combining senior and junior debt.

Finally, the ideal financial partner is one that is willing to share its knowledge. Working with a knowledgeable lender gives companies the opportunity to see their business — and their business plans — through the eyes of an expert. That fresh perspective is invaluable.

Peter Lewin is a managing director with Capital One Commercial Banking. His team specializes in providing tailored banking and lending solutions to transportation and logistics companies across the U.S. He can be reached at peter.lewin@capitalone.com.