Global supply chain investors keep close tabs on 3PL M&A activity

Kris Hopkins, a Director in the Transportation & Logistics Group of Houlihan Lokey, Inc., an independent, advisory-focused, global investment bank, has been keeping close watch on the volatile 3PL sector this year.

In this exclusive interview, he shares a few observations and insights, while providing a brief forecast for supply chain managers preparing for the year ahead.

Supply Chain Management Review: What was the principal message you wanted to relay during your presentation at the Armstrong & Associates 3PL Value Creation Summit?

Kris Hopkins: That’s an interesting question. The subject of the panel discussion was Summarizing the M&A Landscape in the Logistics Industry.  As an investment banker dedicated to the sector, I had no shortage of thoughts to share. The prevailing theme was that it is an extremely active M&A market by any measure–number of closed deals or by deal value–supported by several important and sustaining factors. 

SCMR: Can you expand on that?

Hopkins: Certainly. First, you have a record amount of dry powder from private equity firms that they are seeking to deploy in attractive, asset-light or non-asset based logistics platforms. These platform investments are often the starting point, with significant incremental capital deployed post-close to support additional growth, be it expansion into new markets or service areas, or growth by add-on acquisition. Second, you have strategic acquirers who are seeing the pace of M&A activity and don’t want to be left behind, as competitors expand into new markets and increase their market share through acquisition. The third factor is a healthy credit environment with abundant and inexpensive capital, albeit one in which rates are rising that enables strategics and PE firms alike to finance acquisitions or implement comprehensive refinancings of the existing capital structure.

SCMR: Any other observations on disruptive trends?

Hopkins: Yes. Despite recent equity and debt market volatility, the macro growth story remains intact with strong fundamentals including robust hiring, historically low unemployment rates, rising wages, strong consumer spending and solid GDP growth expectations. Sector-specific metrics also point to a favorable freight market with the ATA tonnage index, spot rates and contract rates at very attractive levels. This confluence of factors has led to strong confidence by strategic and financial investors who are willing to “pay up” for attractive assets, tipping the scale in favor of sellers who are achieving record valuations. No doubt, it is a better time to be a seller than a buyer in this market.  
  
SCMR: What common attributes do you see acquirers looking for in businesses and what have been some of the most active areas?

Hopkins: Typically, the businesses that command the highest level of buyer engagement in an M&A process are those that have some scarcity value – they offer a service and unique value proposition to customers, be it in speed, cost, reliability or a host of other factors that make them stand out from the pack. Many of these companies are not industry behemoths but small and mid-sized businesses that have grown up in part by filling a need that was previously unmet by larger 3PL’s and carriers. 

SCMR: What about the so-called “middle-market?”

Hopkins: While larger, transformational M&A deals will likely continue, many gems can still be found in the middle market and I expect this segment to arive much of the industry consolidation. Of course, management strength and a deep bench is important for strategic buyers and more acutely for private equity buyers who are not in the business of running their portfolio companies. Private equity buyers will need to be convinced that executive leadership have shown an ability to adapt and innovate their service offering over the years to continually meet the ever-changing needs and expectations of its customer base. They will also gain comfort in management who is willing to roll a meaningful portion of their existing equity into a new deal to ensure interests are aligned.

SCMR: Where else may we expect growth?

Hopkins: As for most active areas, the rapid growth in e-commerce will continue to provide tailwinds for 3PLs involved in final mile delivery, particularly those with broad footprints who can benefit from a network effect. 3PL’s that have a focus and core competency in expedited freight will see outsized growth as many customers wish their product was delivered yesterday!  I also expect to see further buyer interest in freight brokerage companies. This interest is not just from other freight brokers looking to grow into a new market or expand their service offering, but also from asset based carriers who realize the growth potential in this market and the numerous benefits of becoming more asset-light. 

SCMR: How can supply chain managers mitigate risk when engaging multiple 3PLs? Any advice?

Hopkins: It really comes down to track record and the ability of the 3PL to demonstrate to the supply chain manager how they filled a need and became a trusted and value-added partner to a customer with a similar need. Consistency and reliability of service and an organization that meets or exceeds industry KPIs is of utmost importance. The most effective way to mitigate risk as a supply chain manager is to clearly communicate expectations and take a measured approach when engaging new 3PL’s, whereby you expand the relationship as they demonstrate an ability to execute well on smaller projects. 

SCMR: What are you telling companies that are considering M&A and financing transactions next year?

Hopkins: Strike while the iron is hot. Geopolitical and economic factors can change the market trajectory quickly and it is very difficult to predict what tomorrow will hold. Despite recent market volatility, rarely have we seen an M&A market cycle as strong as the one we are in today, and buyer appetite for high quality assets remains as high as ever. Ultimately it comes down to owner objectives and time horizon for wanting to stay with the business, and an experienced investment banking advisor can assist in this review of strategic alternatives to make sure they are making a well-informed decision.