This year is not starting out favorably for publicly traded fleets that want to convert to private ownership. Equipment pre-buys and disappointing freight volumes in 2006 and on into 2007 have contributed to trucking companies’ disappointing earnings and depressed stock prices, argues Gary Ciuba, a managing director at Stephens Inc. Although early 2007 was a good environment for going private, market conditions as of late 2007 have dictated a change in strategy, he told Fleet Owner.
In the first five months of 2007, private equity acquired 16 for-hire carriers, Ciuba said, which was more than for all of 2006. This was due to high fragmentation and hopeful long-term prospects for freight transport, as well as a reflection of a recent trend for public companies in many industries to sell to private equity groups and investors in all-cash transactions.
However, in late 2007 banks began to shy away from lending to trucking concerns partly due to economic concerns, issues specific to the credit markets, motor carriers’ falling stock prices and 2006 pre-buys causing approximately 70,000 to 80,000 too many trucks to be on the road, Ciuba said.
Ciuba is optimistic about 2008. “The freight environment will likely improve before everyone believes it will,” he said. “The freight recession began in the middle of 2006, and according to our analysis, the history of such recessions over the past 20 to 30 years shows this current recession to be one of the longer ones—the longest in that time period went 21 months.”
So despite the sluggish freight environment forecast for early 2008, there should be no fear of a prolonged downturn. “We could go longer, but history says we should be pulling out of this freight recession by the middle of this year at the latest, perhaps by the 2nd quarter,” he said.
Ciuba’s advice is to wait out the freight recession if your company’s balance sheet is strong. But if you are struggling, you don’t want to be in liquidation. “If you think you may not be able to make it through the second quarter, then you certainly should think about selling,” he said.
However, selling may be a necessity for many companies, as Ciuba said that bankruptcies were up 37% in the second quarter of 2007, and it may not be worth it to hold out for a better offer that may not come for a while, if at all.
For example, Jerry Moyes, founder and former chairman of Swift Transportation, paid $31.55 a share--a total of $2.74 billion--in cash to take the company private in May 2007. Now, Swift bonds are trading at 50 cents on the dollar and have a yield in the low 20s, Ciuba said. “Had Jerry waited until now he would have paid much less,” he pointed out.
Ciuba said trucking companies should know better than anyone what the rate environment looks like, but should wait for sustained rate improvement over a couple of months, not just weeks, before embarking on a sale process where their objective is to get full value for their company.