Inbound Logistics | July 2007 | Digital Issue

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BY JONATHAN L. IVES, CFA Director and Head of Transportation and Logistics Group Investment Banking Group, National City Corporation (216) 222-2825 • jonathan.ives@nationalcity.com www.nationalcity.com/investmentbanking

Third Party Logistics Mergers and Acquisitions

W ith almost 600 reported deals representing more than $79 billion in aggregate transac- tion value since 2005, the transportation industry has seen significant mergers and acquisitions transaction activity. Third party logistics is one of the most active sectors within the transportation industry for private equity investment and strategic buyer acquisitions. Consolidation Although the third party logistics industry is currently highly fragmented, it is expected to become increasingly concentrated. Shippers are continuing to consolidate their business with a smaller number of providers that offer a breadth of services in order to meet both domestic and international logistics and warehousing needs. Private equity firms have played a part in consolidation thus far by focusing on aggregating smaller players and building scale through numerous acquisitions. Other factors driving industry consolidation include the ability to penetrate new customers and end markets as well as diversify cus- tomer concentration. Expansion of service offerings and acquisition of proprietary know-how and technology are also driving increased volumes of transactions. Private Equity Investment Despite the pace of investment by private equity firms in the last several years, we still observe, by various estimates, as much as $400 billion of equity capital waiting on the sidelines and looking for attractive situations in which to invest. Private equity funds are investment firms that aggregate capital and seek to acquire private and publicly traded companies. Third party logistics businesses have attracted substantial inter- est from private equity buyers due to high industry growth rates and limited capital investment requirements. Private equity interest is particularly strong for asset light and non-asset based business models. Asset light models are defined as transportation providers that utilize owner-operators and avoid the large capital expenditures typically required to maintain company owned fleets. Non-asset based models involve the use of technology or intellectual property to act as an intermediary for transportation arrangement, warehous- ing, and supply chain management. These firms are characterized by very limited ownership of transportation equipment and real estate. Private equity firms have been successful with transportation and logistics companies in various sub-segments. Areas of focus for

private equity firms have included expedited transportation services, freight forwarding, intermodal transportation, warehousing, reverse logistics, and transportation management. In terms of criteria, a capable management team is one of the most critical elements that private equity firms use to evaluate new opportunities. In certain instances, private equity firms part- ner with an industry executive that has a track record of value cre- ation, particularly in a situation where an entrepreneur is looking to exit. An established customer base with limited reliance on any one customer or group of customers is another key consideration for private equity logistics acquisitions. Logistics companies with a defensible market position and a differentiated service offering are also attractive. Valuation of Logistics Acquisitions Many factors specific to the buyer and the target affect the cash flow multiple that will be paid in a given sale process. In the logis- tics industry, non-asset or asset light operating models drive the highest transaction multiples. Historical and prospective growth represents an important consideration for valuation of logistics transactions. Broader industry conditions and volatility, not only within the economy but also the third party logistics industry, are also a factor in valuation of logistics acquisitions. Finally, scale and size have an effect on valuation with higher cash flow multiples being paid for larger situations. About National City Capital Markets Investment Banking and its Transportation and Logistics Group National City Bank is the 11th largest bank in the U.S. with over $140 billion in assets. National City Capital Markets’ Transportation and Logistics Group is a team of highly experienced professionals dedi- cated to providing financial and strategic advisory services to middle market transportation and logistics companies. Our investment bank- ing services include sell-side and buy-side acquisition advisory, capi- tal raising, going private transactions, restructurings, and corporate divestitures. For sell-side advisory services, we have met or exceeded valuation expectations for selling shareholders for over 90% of our engagements. The Transportation and Logistics Group hosted a web seminar on third party logistics trends and mergers and acquisitions, which is available at www.nationalcity.com/seminars . Both the replay and copies of the presentation and transcripts can be found under the Archived Webcasts section. Jonathan Ives can be reached at jonathan.ives@nationalcity.com .

26 Inbound Logistics • July 2007

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