BANGALORE/NEW YORK Growing confidence in a recovery in the freight transport market is about to set off a wave of consolidation in the U.S. logistics industry as cash-rich companies seek to expand into new services and geographies.
Among those hunting for buys are FedEx (FDX.N), C. H. Robinson (CHRW.O), Hub Group (HUBG.O), Ryder Systems (R.N) and Forward Air (FWRD.O) -- companies that offer a variety of logistics services.
And analysts say this is a good time to buy these stocks as history suggests a buying spree is usually a precursor to a sharp rise in stock prices and an uptick in freight volumes.
Stocks of FedEx and Ryder have recovered from their recession lows, but are still trading below their 2007 highs.
The transportation and logistics market in the United States is highly fragmented and consists of a variety of services including third-party logistics, intermodal, brokerage, and pure-play truckers and railroads.
Most of the deal activity is expected to happen among the transportation services and management firms which generally do not own assets of their own but arrange the shipment of goods from manufacturers to distributors.
FedEx had about $1.36 billion in cash as of February 28, while CH Robinson had almost $400 million at the end of 2010.
Publicly traded logistics companies and private equity firms are seen as the most aggressive buyers, going after smaller private companies that are highly add to profit and revenue.
Hub Group got the ball rolling with an $83 million buy this month of Exel Transportation to gain volume in the fast-growing intermodal market. Ryder has done four deals in as many months.
"There are many more in the works," said Tom Connolly, managing partner at investment banking firm Eve Partners. "I think we are going to see a very active consolidation wave over the next 24-36 months."
Ken Novotny, an investment banker at Morgan Keegan, expects most deals to be in the $20-$250 million range and very few to exceed $500 million. Caterpillar's (CAT.N) third-party logistics business could be one of the bigger deals in the sector.
In March, Caterpillar said it was evaluating strategic options including a sale of the business, which, according to one banker, has more than $1 billion in revenue.
Clark Holdings GLA.A, which provides transportation management and freight forwarding services, is also exploring strategic alternatives, including a sale, and is being advised by Eve Partners.
"It's a combination of companies that have built a war chest of cash during the downturn and now see opportunities, and a sign that they're getting more confident in the business outlook," said Kevin Sterling, a transportation analyst at BB&T Capital Markets.
HUNT FOR NICHE PLAYS
Joe Connor, a banker with Harris Williams, said he was seeing a lot of companies focusing on niche acquisitions.
"The activity we see is more driven around unique specialization in the sector. Strategic buyers are attracted to that versus what I would call two large platforms combining," said Connor.
Recently, CI Capital-backed Transplace bought SCO Logistics to enter the chemicals market.
In late 2009, CI Capital bought Transplace from a group of companies including JB Hunt (JBHT.O), Swift Transportation (SWFT.N) and Covenant Transportation (CVTI.O).
Intermodal marketing companies (IMCs), which in many instances bring the freight in containers to be shipped by the rails, are ripe for mergers, said Sterling of BB&T.
"Ten, 15 years ago there were a couple hundred IMCs. Today, there are probably less than 80. I think we'll continue to see consolidation. Scale matters," said Sterling.
Intermodal shipping, which refers to shipping goods in containers that are moved between different forms of transportation, such as from ship to trains, is picking up steam as fuel prices and trucking costs increase.
Other than intermodal, truck brokerage and freight forwarding are also of great interest now, said Eve Partners' Connolly.
A new regulation that can tighten driver supply and capacity in the trucking industry -- expected to come into force in the next few months -- is also prompting some companies to look at more buys.
Private equity is also very active in the space.
Morgan Keegan's Novotny said there are about 175 private equity sponsors actively looking for logistics deals.
"When we run a process, we can often see 10 times the amount of interest from private equity sponsors than from strategic buyers," said Novotny. (Reporting by A. Ananthalakshmi in Bangalore and Lynn Adler in New York; Editing by Sriraj Kalluvila)