Hot Freight Opinions: Reaction to Knight’s LTL move

JP Hampstead, director, Passport Research

I don’t think that Dave Jackson & team will settle for a regional LTL network in the Southeast and Midwest, so expect more acquisitions — or at least real estate deals — as Knight-Swift seeks to fill in geographic white space. The deal may also herald an era of more creative M&A where carriers wary of increasingly volatile truckload cycles will diversify revenue and service offerings in an attempt to build sustainable enterprise value.

Read JP Hampstead’s Twitter thread on the deal

Dooner, producer/host, WHAT THE TRUCK?!?

I love the recruiting and driver satisfaction angle. Should they integrate properly, you have a number of different opportunities for drivers to run everything from OTR to more dedicated LTL loops. My concern would be with creating synergy between sales teams. Selling TL and LTL are completely different beasts as are the operations behind them.

Todd Maiden, finance editor

Knight-Swift’s management team has a proven track record of successfully integrating acquisitions. The Swift merger presented significant deal risk when it was first announced in 2017. Swift had a highly leveraged balance sheet and operated at depressed margins. Today, Swift’s fleet actually operates at a modestly better operating ratio than Knight’s legacy fleet.

If AAA Cooper is run as a separate business with most of the current leadership in place, as is the plan, there is likely minimal deal risk with regards to revenue or employee/driver attrition. Additionally, AAA Cooper should see improving financials and capital returns through economies of scale in areas like procurement, shared technologies and working with Knight-Swift, which is a true operator in the transportation industry.

While not overly accretive to earnings, 30 cents per share (less than 10%), the deal is transformational for Knight-Swift as it now has a fourth leg (in addition to truckload, brokerage and intermodal) to build upon.

Zach Strickland, market analyst

This is a pure financial move with KNX being pushed to grow as a publicly traded company and flush with cash. It is a decent decision to diversify and potentially tap into a new batch of customers and grow in size without being able to purchase trucks.

The idea that this will have any synergy — or that the operational expertise at the nation’s largest truckload provider will aid AAA Cooper’s operating revenue — is most definitely overstated. Its success with the Swift merger is completely irrelevant, as an LTL operation is like calculus to truckload’s basic math. Operating systems and financial measures are very different between the two sectors and language barriers will prevent rapid assimilation. It will be years before they see any real synergy, if they ever do.

It will, however, be a financial success on paper as they will have invested their surplus cash and grown the balance sheet at a time when growth is required with the trucking industry booming and LTL is not a bad way to mitigate sharp changes in the truckload market.   

Michael Baudendistel, market expert

I can see why Wall Street’s reaction has been favorable, as the deal seems to check all the boxes. It expands Knight-Swift into LTL, an area that, relative to truckload, is higher-growth, less cyclical, much more concentrated and with far higher barriers to entry. LTL has been a hot area for investors in part due to Old Dominion’s tremendous success, the growth in e-commerce and the trend of moving inventory closer to areas of consumption. There also appear to be synergies with a portion of Knight’s customers also shipping LTL and with the sharing of data and market intelligence.

Perhaps most exciting is the potential for leveraging Knight-Swift’s access to capital to expand AAA Cooper’s LTL network nationwide. The resulting debt load should be manageable and should come down over time. So, I see this as not only accretive to the company’s earnings, but also a factor that should support its trading multiples.

RELATED LINKS

Trucking M&A deals getting bigger; Knight-Swift takes on LTL

Knight-Swift enters LTL arena with $1.35B acquisition of AAA Cooper