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Supply chain woes: Logistics M&A drops as demand falls

The early days of the pandemic were a boon for online shopping, putting pressure on global supply chains. That led to soaring freight rates and profits for logistics firms, with many capitalizing on frothy valuations to take dealmaking in 2021 to record levels.

Now, with talk of an imminent recession, substantially lower freight rates, and buyers struggling to justify the inflated valuations of sellers, logistics M&A is slowing down significantly, several sector bankers cautioned.

Last year, 113 deals for North American-based logistics targets worth USD 20.6bn were signed, the highest dollar figure on record, according to Dealogic data. In the year to date (October 17), dealmaking has dropped to USD 7.3bn. With about 10 weeks remaining, 2022 will still be a strong year historically, but is on pace to contract by about 50% from last year’s value, a bigger drop than North America’s overall M&A slowdown of 43%.

Valuation discord

When the locked-down masses drove ecommerce in 2020 and 2021, logistics companies’ earnings grew so rapidly those choosing to sell could command valuation multiples of 12x EBITDA or more. As the market has softened in 2022, such rich valuations have become increasingly unsustainable. Buyers are likelier to pay an 8x to 9x multiple now and sellers should modify their expectations, said the bankers. Some even warned valuations could plummet to below those during the last down cycle in 2019.

Mergermarket’s recent coverage has underscored this shift to more conservative valuations. XPO Logistics’ intermodal freight business sold to STG Logistics in March for USD 710m – or 8x to 9x its USD 80m in EBITDA that Mergermarket had predicted two months earlier.

Several other potential deals are in the works but have yet to transact. In May, Mergermarket reported that the valuation of Transportation Insight, a Gryphon Investors-backed provider of third-party logistics that was on the market, would likely drop from a mid-teens to a low-teens multiple of EBITDA.

In August, Mergermarket reported that Stellex Capital Management-backed Go To Logistics, which was seeking a double-digit multiple in a sale, would likelier fetch 8x to 9x EBITDA.

More recently, Trident Transport and Perimeter Global Logistics were both looking to sell, despite the weak market.

Return of the strategic buyer

Private equity firms have traditionally liked investing in logistics firms, but are now likelier to sit on the sidelines than strategic groups given they typically need to stick to financial metrics to make their models work, the bankers said.

Cash-rich transport giants—particularly from Europe—have recently closed large deals in North America and are likely to continue M&A, some of the bankers said. Last December, France’s CMA CGM Group signed a USD 3bn deal for Ingram Micro’s logistics unit. In February, Denmark-based A.P. Moller-Maersk paid USD 1.7bn for Pilot Freight Services and could target other US companies like it. Last month, Germany-based DB Schenker acquired truckload group USA Truck for USD 285m.

In the US, warehousing and cold storage specialist Lineage Logistics, which raised USD 1.7bn in equity in January, is expected to maintain its acquisition spree, one of the bankers said.

Small companies whose owners lack the resolve to work through another down cycle could sell. But, as one banker said, if they have an exit horizon of at least a few years, they will be wiser to hold off right now.