Covenant goes deep into the logistics business with acquisition of Landair

An almost $100 million acquisition is giving Covenant Transportation (CVTI:NASDAQ) a boost in the warehouse and logistics business.

Covenant said Thursday that it was acquiring Landair Holdings of Greeneville, Tenn. Landair Holdings is the holding company for Landair Transport and Landair Logistics. The purchase price was reported as $83 million in cash and the assumption of $15.5 million in Landair debt. Covenant said the acquisition is expected to be immediately accretive.

“The warehousing and warehouse services service offering is new for us as we did not have that capability before acquiring Landair,” Richard Cribbs, Covenant executive vice president and CFO told FreightWaves in response to email questions. “It does allow us to provide warehouse services for multiple shippers and we believe there are future revenue synergies in that space that we want to provide for CTG’s historic shipper base.”

Landair has 430 trucks and 900 trailers, and that truckload division will report its earnings as part of Covenant’s truckload segment. By contrast, Covenant has 2,559 tractors and 7,134 trailers.

The Landair Logistics segment will report its results as part of Covenant’s Managed Freight segment. However, Covenant said in its acquisition announcement that the Landair business will not be folded into Covenant’s operations, the company said, with John Tweed continuing to serve as the Landair president and Landair maintaining its Greeneville headquarters.

”Landair’s employees and customers should notice little change moving forward,” Covenant said in its release.

Landair’s primary trucking operations are in dedicated services. In 2017, according to Covenant, it posted approximately $60 million in dedicated trucking revenue, and $20 million in one-way truckload activities. About $41 million in revenue was in its managed freight services operations. That puts the purchase price at about 0.8 times revenue. Investors liked the acquisition. At about 12:30 pm, the price of Covenant stock was up 59 cts to $31.62, an increase of 1.9% when broader markets were up about 0.5%.  

Landair’s activities may overlap those of Covenant, but the balance is significantly different. For example, in the fourth quarter of 2017, Covenant reported its asset-back truckload revenues as $144.8 million, and its revenue from Covenant Transportation Solutions as $36.7 million, so the logistics business at Covenant is only about a quarter of the size of the truckload division. By contrast, the ratio at Landair is closer to half, if the dedicated and truckload is combined. The Covenant logistics business is also smaller in revenue than that of Landair.

The dedicated and logistics aspects of Landair were at the center of Covenant’s prepared statements on the acquisition. “Landair is a perfect fit with our strategy to grow in areas where we can get closer and more heavily integrated with customers,” Covenant’s chairman and CEO David Parker said. “We believe the backing of (Covenant Transportation Group) will provide additional resources to expand Landair’s dedicated truckload operations to best meet the needs of its strong customer base, as well as improve profit margins through identified cost synergies.”

That idea of getting closer to the customer basis was echoed by Cribbs. “We purchased it more for the added service offerings that it provides that gets us deeper integration with shippers that we believe will reduce the cyclicality and seasonality of our business model to provide more stability to our cash flows regardless of the economic cycle,” he said.

Landair is privately held. Tweed said in the Covenant statement that for Landair to have “continued growth at the pace we are experiencing requires access to the resources and support of a strong partner like CTG.”

Cribbs said there was “virtually no overlap” on the company’s respective top 10 customers. No customer will represent more than 5% of the combined company’s consolidated revenue, he added.

The strategy of “buying drivers” in a tight driver market was not a part of the acquisition strategy, according to Cribbs. “This was not really a part of the consideration, but a nice added benefit to get such a solid group of qualified professional drivers with it,” he said.