The global supply chain crisis of 2021 and 2022 highlighted the strategic importance of the transport and logistics industry. Since then, the industry has emerged as a focal point for transformational M&A activity, primarily as a result of the burgeoning demand for direct-to-consumer deliveries, fluctuating freight rates, growing shipper demands and rapid technological advancements. These changes present both challenges and opportunities for company owners, buyers and sellers.
Evolving Trends in Transportation
The industry saw a dramatic increase in M&A activity during the pandemic, driven by a generational bull market for freight and a surge in earnings for transport service providers. This environment attracted new investors – both strategic and financial – who were eager to capitalize on the sector’s newfound profitability, increasing competition among would-be buyers, and pushing valuations to record highs. Sellers in some cases successfully bargained for a risk-free exit, with buyers agreeing to rely entirely on representations and warranties insurance rather than indemnities.
But when supply chain disruptions subsided a retrenchment followed, with less freight moving in most markets, lower ocean container rates and stagnant spot truckload rates. Valuations became more challenging with the passage of time, as peak performance months dropped off the trailing 12-month lookback period. Sellers suddenly faced increased pressure to meet more demanding benchmarks, and accept complex earnout structures. Equity rollovers, deferred payments and seller notes all made a comeback, as buyers and sellers looked for creative ways to bridge the gap in valuation expectations. Transactions in this sector now feature more intensive due diligence, including expert evaluations of the target’s profitability, an analysis of its routes, lanes and network fit, and a detailed review of its technology infrastructure and cybersecurity protocols. A quality of earnings report has generally become standard in these types of transactions.
Transport and logistics company owners from the Boomer generation might have their eyes set on retirement, but with the slowdown in M&A activity throughout 2023, many of them seemed to be waiting for the right time to exit. This has created a backlog of targets available for purchase. The message to any prospective vendor that may be looking to sell is get everything in order, to attract the right suitors and ensure that the most important deal in your company’s lifetime goes as smoothly, and profitably, as possible.
Strategic Acquisitions
Private equity firms may have been weighed down by challenging debt markets, but strategic buyers have continued to be very active in the M&A landscape, motivated by the need to acquire scarce resources such as equipment, drivers, and complementary services. Supply chain management is more complex than ever, with shippers demanding more services, shorter delivery times, real-time visibility, sophisticated digital capabilities, automation, sustainable infrastructure and broader geographic coverage. All of this is triggering more vertical integration in the logistics industry. We have seen this in several transactions between Q4 2023 and Q2 2024: a motor carrier acquiring a freight brokerage; a 3PL acquiring a customs brokerage; a major bus company entering a new geographic region; and a crowd-sourced delivery company acquiring a target with cutting-edge technology. In all these cases, buyers typically look for targets with strong management in place, whom they need to retain post-closing. This may require fairly extensive negotiations with key management personnel, including the payment of significant retention bonuses in some cases
Nearshoring is no longer just a buzzword or a trend: it is a reality, and logistics service providers are actively seeking (or being pushed by key customers) to expand their footprints across North America. A notable example of cross-border M&A in this space was the acquisition, earlier this year, of Vancouver-based ProPack Logistics by Stord, a leader in high-volume fulfillment services and supply chain technology for omnichannel mid-market and enterprise brands. ProPack was a strategic addition to Stord’s portfolio that brought over 30 years of experience in multichannel fulfillment, last-mile shipping, value-added and reverse logistics. Miller Thomson was proud to act as Canadian counsel to Stord in this transaction, which dramatically expanded our client’s fulfilment network, linking ProPack’s well-established warehouses in Seattle, Salt Lake City, Nashville, Vancouver and Mississauga with Stord’s existing network of fulfilment centres in Atlanta, North Haven, Dallas, Reno and Las Vegas.
The Importance of Planning
For sellers, timing the exit is crucial. Rising costs, including fuel, insurance, and interest rates, add pressure to decision-making. Planning for that exit is equally important, and it is never too early to get started, with a view to maximizing the company’s valuation and sale proceeds. Planning may take one to two years, starting with a thorough self-evaluation that will form the basis of the narrative for circulation to prospective buyers. Sellers will want to get a head-start on developing structures designed to minimize taxes on proceeds from the sale, and setting up their estate plans. They will also need to have professional valuations done, and conduct in-depth pre-sale due diligence followed by a clean-up of any regulatory, risk management or financial concerns. Perhaps the most critical part of this process will be the selection of trusted financial advisors and an M&A deal team with industry-specific knowledge and experience.
