NEW YORK, May 28 (Reuters) - Merger and acquisition lending in the freight transportation and logistics sector is accelerating amid a consolidation boom as firms compete for access to larger networks to meet demand from customers and investors.
The scale of the acquisitions and the loans backing them are increasing as a strong dollar helps U.S. companies to snap up European peers and investor demand for floating-rate loans remains strong.
Fifty-four transportation and logistics mergers and acquisitions in the first quarter totalled $27.2 billion, well above 44 deals totalling $17.7 billion in the same period last year, professional services firm PwC said. The average deal value of $504 million was the highest since $585 million in the first quarter of 2012.
“Last year M&A was up, and this year seems to be up as well but with bigger deals,” said Jason Seidl, transportation analyst at Cowen & Co.
The value of M&A in the transportation and logistics space trailed intense takeover activity in the healthcare, pharma/life sciences, retail and energy sectors, but surpassed the amount in technology, utilities, aerospace & defense, manufacturing and chemicals, according to PwC.
A 2.4 billion euro bridge loan backing Connecticut-based XPO Logistics Inc’s $3.5 billion acquisition of France-based logistics company Norbert Dentressangle SA in April was one of the biggest in the freight brokerage business. The deal showed a push by larger U.S. logistics companies, which manage the way products are obtained, stored and delivered, to expand international services.
In the broader goods transportation and parcel delivery business, FedEx Corp in mid-May secured 2 billion euro of fully committed debt financing for its 4.4 billion euro takeover of Dutch package delivery firm TNT Express.
“Cheap financing helps everyone. You’ve got a perfect storm at work here,” said Kevin Sterling, senior equity research analyst at BB&T Capital Markets. “It doesn’t seem like anyone is overpaying,” he said, adding that although valuations are rising as consolidation increases, “this is not an Internet bubble.”
M&A deals are most likely to increase in the non-asset-based and asset-light segment, in which companies own no or little equipment, such as the trucks or distribution centers needed to run customers’ supply chains, but negotiate contracts using their relationships with warehouses, truckers and other carriers, analysts said.
“First quarter earnings for the non-asset-based world were not about what you produced in earnings, it was about who you bought.” Seidl said.
XPO, which swiftly followed its acquisition of Norbert Dentressangle with a $100 million purchase of asset-light U.S. company Bridge Terminal Transport, told Reuters that it plans to make at least one or two more deals by year end, either in North America or Europe.
Financial investors such as private equity firms are playing a significant role in driving deal activity and accounted for almost 40 percent of volume in the first quarter of 2015, said Darach Chapman, U.S. transportation and logistics deals principal at PwC. Leveraged loan activity and debt multiples would suggest that investors will continue to do so while cash-heavy corporations will also keep stoking M&A, he added.
The fragmented nature of the freight transportation and logistics sector lends itself to consolidation. Less than 30 freight brokers generate more than $200 million each in gross revenue, said Matthew Young, Morningstar transportation and logistics equity analyst.
“Beyond that it falls off precipitously, to very small, mom and pop, niche intermediaries that have been in the business for a while and there are thousands and thousands of them,” he said.
XPO’s Norbert acquisition creates the world’s second largest freight brokerage by net revenue, behind C.H. Robinson Worldwide Inc.
Those two companies along with Echo Global Logistics Inc, and FedEx and its rival package delivery company United Parcel Service Inc are the most likely buyers in the industry that has nearly 10,000 freight transportation brokers operating across North America, analysts said.
“I see the industry consolidating over the next 10 years to the point where you have a group of very, very large players, not much in the middle, and a bunch of niche players,” said Seidl.
Bigger companies are spending heavily on technology to improve supply chain efficiency, investment that is out of reach for many smaller companies and will encourage them to agree to be bought in order to increase customer product offerings and pricing advantages that come with large-scale buying, analysts said. (Editing By Tessa Walsh)