Stabilization in Second Half of Year Expected to Serve as Catalyst for 2024 Transportation & Logistics M&A Activity
The years 2022 and 2023 have presented a difficult environment for companies moving and facilitating the movement of freight, with pricing and volumes down substantially from 2021 highs. During the COVID-19 pandemic, the typically unsung $8-$12 trillion Logistics & Supply Chain ecosystem (FreightWaves1) garnered unprecedented attention and became top-of-mind for consumers and businesses trying to procure then hard-to-find products. Seismic e-commerce and technology-driven industry shifts accelerated, leading to record levels of Transportation & Logistics merger and acquisition (M&A) activity starting in late 2020 and into early 2022. As the world opened up in 2022, consumer spending shifted back from lockdown-driven goods spending to more service-related industries, the Federal Reserve started a historic tightening cycle, and supply chain pressures subsequently eased.
Deal activity cooled in the second half of 2022 and Transportation & Logistics M&A volume is down 29% year-over-year (YOY) as of September 15. Capstone expects industry stabilization and potentially improved company performance in the second half of 2023, which could provide a catalyst for accelerated deal activity leading into 2024. With high interest rates challenging private equity, strategic buyers have reasserted themselves as the dominant industry acquirors, and have accounted for 64% of Transportation & Logistics M&A activity year-to-date (YTD). The adoption of logistics and supply chain technologies will continue to shape the industry; however, we expect the growth capital raising environment for early-stage companies to continue to be challenged. M&A may serve as a substitute for what would have been capital raises in more accommodating capital markets.
Freight Brokerage & Digital Freight See Revenue Declines
Freight brokers, almost across the board, have seen more than 30% declines in revenue from the first half of 2022 to the first half of 2023, with even larger declines in profitability. As a result, sector deal activity has been muted over the past 12 months. Transactions in late 2021 represented the last substantial flurry of M&A activity around the sector, these included Uber Freight's acquisition of Transplace for $2.3 billion (July 2021), Jordan Companies' acquisition of Echo Global (Nasdaq:ECHO) for $1.3 billion (September 2021) and AEA Investors' acquisition of Redwood Logistics (December 2021, terms of the deal not disclosed).
Capstone expects activity to be largely slow until pricing and volumes trend back to historical averages. There is a critical mass of potential sellers who may have potentially held-on too long, reaping the rewards of the strong 2021 and early 2022 freight environment. When the Freight market eventually tightens and conditions return to historical averages, we anticipate some of this pent-up activity to come to market. Business models more insulated from the dramatic shifts in spot pricing and/or that have niche capabilities will continue to see strong strategic acquiror appetite, despite weakness in the broader environment.
Warehousing & Fulfillment Continues E-Commerce Transformation
The Warehousing & Fulfillment sector has experienced the most e-commerce driven transformation of any area within the Logistics ecosystem. The sector underwent a wave of deal activity in 2021 and early 2022. Nascent, technology-enabled platforms such as Shipmonk, ShipBob, and Stord raised capital at valuations of more than $1 billion. Large Logistics sector integrators such as Maersk (CPSE:MAERSK B) and Ryder System (NYSE:R) have made multiple acquisitions as they build a more comprehensive D2C (direct-to-consumer) offering for customers for which they had traditionally only provided B2B (business-to-business) services. Notably, Ryder acquired e-commerce and omnichannel fulfillment companies Dotcom Distribution (November 2022, undisclosed) Whiplash (January 2022, $480 million), and Midwest Warehouse & Distribution System (November 2021, $135 million).
E-commerce growth has moderated from its peak of 16.5% of retail sales in Q2 2020 to 15.4% in Q2 2023, but remains well above the pre-pandemic 12%, according to the U.S. Census Bureau.2 In tandem, Amazon (Nasdaq:AMZN) has continued to slow its warehouse growth, having closed, canceled, or delayed 99 U.S. facilities, according to a March 2023 article by Retail Dive.3 This year has been and will continue be a year of mixed performance and moderated deal activity. In the longer-term, Capstone expects sector consolidation to be an important trend, with sector leaders differentiating with strategically-placed nationwide (and sometimes international) networks and leveraging scale benefits to implement technologies across their networks. Niche sectors that have unique handling and environmental needs are of highest strategic M&A interest, and also are areas where smaller players can continue to thrive by providing focused customer service.
Funding Slows for Logistics & Supply Chain Technologies
Underpinning the consolidation trends and evolution of business models and networks by e-commerce proliferation, is the implementation of new technologies. With new digital technology comes scalability, repetition, and automation of processes across vast networks. Logistics Technology sector funding has cooled markedly from its 2021 peak of $26.5 billion, with 2022 down 36.8% and 2023 on pace to be down as much as 70%. Investor interest in the space remains high, but the higher interest rate environment will continue to keep growth investors more selective about where and how they deploy capital.
Combined with lower overall sector profitability, the tighter capital environment is having and will continue to have significant sector implications including:
- Technology implementation will be more selective, as logistics and transportation companies will be more focused on implementing “need-to-haves” and be more discerning about implementing “nice-to-haves.”
- Financial runway will have meaningful competitive implications. More capital constrained logistics technology companies are reigning in growth plans, allowing better capitalized sector participants to move ahead.
- Logistics M&A will sometimes replace growth capital raises for companies with strategic and compelling solutions but that need more capital.
Trucking Recovery Creates Buyer Opportunity
The Trucking sector has been acutely affected by slowing freight and freight rates. This year there has been an acceleration in sector bankruptcies by smaller, less diverse players that have difficulty absorbing even a small number of customer losses. Scale players with large legacy liabilities also are under significant financial pressure, as demonstrated by Yellow Corp.'s, formally (OTCPK:YELL.Q), Chapter 11 filing on August 6. Following the severe capacity shortage in 2020 and 2021, the Trucking sector is now estimated to have as much as 25% more capacity than it needs and is not expected to reach a supply and demand equilibrium until 2025, according to Freight Waves.4
The sector challenges have created opportunity for well capitalized sector consolidators seeking to strengthen networks and add capabilities in strategic growth areas. In fact, Knight-Swift (NYSE:KNX) recently completed its largest acquisition to date, with the $841 million acquisition of U.S. Xpress Enterprises in July 2023 (valued at 5.5x EV/EBITDA).
We expect these same trends to persist until sector capacity materially tightens. Even then, sector consolidation will continue at a pace as large players continue to have to scale to compete and differentiate by offering the most comprehensive services at the most competitive rates.
Freight Forwarding, Ocean & Air Cargo
Air freight and ocean cargo volumes rates are at lows not seen since before COVID and freight forwarding companies have experienced more than 50%+ reduction in revenue YTD. There are a multitude of reasons for such a dramatic slowdown and reduction in rates, driven by a combination of easing of peak supply chain chaos in 2021; new cargo capacity becoming available, particularly in Air Cargo; and a rethinking of global supply chain in reaction to COVID driven supply-chain difficulties to keeping key manufacturing closer to the end-consumer.
In North America, the major beneficiaries of the reshoring movement are the Mexico manufacturing economy and facilitators of cross-border freight within North America. Key U.S./Mexico ports continue to see YOY gains in volume, in contrast to domestic freight volume, which is still down as much as 5% YOY, depending on the observed metric.
Our Advice Approaching Year End 2023 and Heading into 2024 in the Transportation & Logistics M&A Market
Market consensus is that the North American logistics and transportation ecosystem is at or near a bottom. Anecdotal evidence suggests there is little room for rates to go lower across most modalities. Additionally, various measures of freight activity are starting to show month-to-month improvement. The path forward, as always, is uncertain, but barring an unexpected negative economic shock and an expectation that the Federal Reserve is finished, or nearly finished, with its tightening cycle, the Freight market should improve heading into and throughout 2024.
With this backdrop, we believe the deal making environment (to raise capital and/or for M&A) will strengthen as the Freight market improves. For those parties waiting for a stronger market environment to transact, we believe beginning preparation sooner than later will best position those parties for accessing the market at the right time and be fully prepared, and the Capstone Transportation & Logistics M&A Team is eager to continue to provide its services to clients old and new.
To discuss the current state of the industry, provide an update on your business, or learn about Capstone's wide range of advisory services and Transportation & Logistics M&A knowledge, please contact us.
FreightWaves, "How big is the logistics industry? Infographic," https://sonar.freightwaves.com/freight-market-blog/how-big-is-the-logistics-industry-infographic, accessed September 19, 2023.
U.S. Census Bureau and Federal Reserve of St Louis, "E-Commerce Retail Sales as a Percent of Total Sales," https://fred.stlouisfed.org/series/ECOMPCTSA/, accessed September 19, 2023.
Retail Dive, "Amazon Closes, Cancels more Warehouses as Cost-Cutting Persists," https://www.retaildive.com/news/amazon-warehouse-closures-cancellations-delays-2023-mwpvl/643845/, accessed September 19, 2023.
FreightWaves, "Truckload Market has 25% Too Much Capacity," https://www.freightwaves.com/news/truckload-market-has-25-too-much-capacity, accessed September 21, 2023.
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