Private equity takes aim at freight logistics

BANGALORE (Reuters) - Private equity firms are expected to steadily increase their investment in the U.S. logistics services industry from 2010 as the freight business shows signs of stabilizing and the industry prepares for a wave of consolidation.

The past month alone saw three private equity (PE) transactions in the logistics industry, which had seen a lull in deal activity since freight volumes began to drop in the fourth quarter of fiscal 2007.

Logistics services -- the management of freight movement -- include freight brokers and third-party logistics firms such as C.H. Robinson Worldwide (CHRW.O), Hub Group (HUBG.O), Landstar (LSTR.O) and Pacer International (PACR.O).

The recent deal activity comes as credit markets start to improve and PE firms shift their focus to defensive sectors such as business services and healthcare amid rising debt.

"Private equity investment will increase in 2010," said Ken Evans, U.S. transportation and logistics leader at PricewaterhouseCoopers (PwC). "I don't think we will go all the way to 2007, but it will increase."

Logistics has been an attractive sector for PE investment as it offers strong free cash flow, low capital expenditure and much higher growth rates than in the transportation industry as a whole.

Transportation, including logistics, is the fourth-largest segment of the U.S. economy and had been growing at an average of 5 percent annually until the recent downturn, said Dave Mitchell, managing director at PE firm Transportation Resource Partners.

Deal activity in the space has already started to show signs of improvement.

Recently, New York-based PE firm CI Capital bought Transplace, one of the top 10 logistics players in the United States, from a group of owners including J.B. Hunt Transport Services (JBHT.O), Swift Transportation SWFT.UL, U.S. Xpress Enterprises and Covenant Transportation Group (CVTI.O).

"Energy to do deals in the sector has not tapered at all. It is just a matter of timing of the markets we are in," said Tom Connolly, managing director at Eve Partners, an investment bank focusing on transportation and logistics.

Another reason for PE interest in logistics is the fragmented nature of the industry.

Logistics, which includes consultancy services, freight brokerage, third-party logistics and freight forwarding, is a highly fragmented market, with no single player controlling more than 6 percent of the U.S. market, according to the Transportation Intermediaries Association.

C.H. Robinson, the biggest player in the $120 billion third-party logistics market with revenue of $8.59 billion in 2008, has less than 6 percent of the market.

"There is a positive story in the logistics industry for PE who can be the consolidators in the industry," said Emeric Deramaux, PwC's director of Transaction Services practice focusing on the transportation and logistics sector.

HIGH IN 2011

Analysts said PE activity in the sector will gradually increase through the year and hit a peak in 2011 or 2012.

"By the second half of 2010, you will see a little more broad-based activity where people are more confident that the economic recovery is real and will try to get some assets at still depressed prices before the economy returns to normal," George Van Horn of research firm IBISWorld said.

Historically, deal activity in the transportation and logistics sector has increased following recessionary periods, according to PwC.

Growth of logistics services is directly tied to the economy and grows best when consumer demand is high and manufacturing is at or near full capacity.

"We've seen in some of the early auction processes that have taken place over the last couple of months that there's been a fair amount of pent-up demand to invest into the space," Marc Kramer, co-head of transportation and logistics at PE firm Fenway Partners, said.

According to Preqin, a consultancy for alternative investments, about 258 PE firms, or about 5 percent of firms globally, are targeting investments in logistics.

In 2009 there were about 21 buyouts in the logistics space with an aggregate deal value of $2.6 billion. This accounted for 2 percent of global PE deals, said Preqin.

GROWTH RATES A KEY FACTOR

Growth rate is another attractive factor -- the third-party logistics sector grew at a compound annual growth rate of 12.5 percent between 1996 and 2008.

It is projected to grow at double-digit rates for the next five years, according to Eve Partners' Connolly.

Joost Thesseling, principal at CI Capital, said over the long term the industry grows at two to three times GDP.

"As the economy improves and capacity issues get fixed, we are going to see a renewed interest in the sector by a lot of PE firms," said Chip Grace, managing director at Wynnchurch Capital, a PE firm whose focus industries include transport and logistics.

(Reporting by A.Ananthalakshmi and Deepti Govind in Bangalore; Editing by Saumyadeb Chakrabarty and Jarshad Kakkrakandy)