There were 135 US or Canadian transportation-related M&A transactions in 2006, according to market analysts BMO Capital Markets. Almost half (48%) of those transactions took place in the logistics sector (defined as asset-light transportation and warehousing) and a bit more than a quarter (27%) in the TL sector with another 7% in the LTL sector. Mullen Group, Transforce, Contrans, and UTi, all income funds, were the most active acquirers in 2006, each with four announced transactions.
Listening the other day to federal finance minister Jim Flaherty's refusal during committee hearings to either apologize for or reconsider the government's plan to curb the growing trend towards income trusts, I was left with one strong impression and a pressing question.
The impression was of just how much shenanigans we allow our politicians to get away with - Flaherty routinely avoided the questions asked and when he finally did get around to answering he used up most of the time to harangue the questioner, who was asking a legitimate question. While I don't disagree with the Conservatives' move to enact legislation that places trusts on an even footing with corporate tax rules, they did break a campaign promise in doing so, many investors lost big chunks of money because of the decision, and they should have the decency to properly answer questions from opposition members when asked in committee. You would think a minority party would know better than to be so cavalier in its attitude.
I also wondered, once the dust has settled, what Ottawa's income trust legislation would mean to the pace of consolidation in the transportation industry. I think the new legislation, will likely clip the wings somewhat of income fund structured players, at least for the short term. But over the long term I can't see how the industry trend can be anything but continued consolidation.
Over the past couple of months I've had the chance to listen to the insights of 10 leading motor carrier CEOs through our Shipper-Carrier Issues Roundtable and a follow up exercise where we asked CEOs to share their visions of the transportation industry 25 years from now.
All of them spoke of continued consolidation, driven by a variety of factors. John Doucet, CEO of Day & Ross, believes there will be 10-15 carriers that will handle the majority of the trucking business and they will be much larger than they are today. Claude Robert, CEO of Robert Transport, goes even further, envisioning companies such as FedEx and UPS, along with logistics providers like Schenker and DHL, controlling up to 75% of worldwide freight distribution. He anticipates a lot of the work handled by his fleet in the future will come through these future giants.
Allan Robison, CEO of Reimer Express Lines, believes that for motor carriers to compete with large sophisticated companies such as UPS and FedEx, they will have to become capable of handling freight from anywhere in the world.
That spells more industry consolidation.
As Scott Johnston, CEO of Yanke Group explains, the days when traffic managers controlled the movement of goods from a manufacturing plant in the heartland of either Canada or the United States are coming to an end. Increasingly, tomorrow's freight moves will be global as more and more companies move their manufacturing and sourcing offshore. Johnston believes this will force Canadian carriers to first identify the parties that control the movement and routing of the goods, or the ultimate offshore true owner, and establish relationships and provide value-added services to participate in the supply chain. That requires sophisticated strategic thinking and that usually means larger carriers.
Ron Tepper, CEO of Consolidated FastFrate, believes 25 years from now motor carriers will have to either be very good at offering niche, regional services or become large enough to go global, offering a wide menu of services. He's already looking for a partnership with a steamship line to be used as an ocean linehaul carrier, similar to the long-standing arrangement FastFrate has with CP Rail.
Again, such moves require large sophisticated players.
In fact, I think the real long term impact of the government's trust legislation will be to provide more opportunities for the traditionally structured players to more aggressively pursue mergers and acquisitions.
Question is, will such intense industry consolidation be good for shippers? I would be interested to hear your thoughts.