SPECIAL REPORT: Could possible Canada Cartage deal spur more takeovers?

TORONTO — Despite the traditional view that trucking trusts aren’t attractive to private equities, news that such a player is in talks to buy Canada Cartage Diversified Income Fund has led transportation analysts from RBC Capital Markets to speculate if other transport trusts are ripe for similar takeovers in the future.

In response to an article in the Globe & Mail this week, Canada Cartage confirmed that it’s “in advanced discussions with a potential acquiror in respect of a sale of the assets of the Fund.”

Although there’s no certainty a deal will be reached, new reports indicate a private equity firm is the suitor, despite the Globe report that speculated an industry rival was the interested party.

Canada Cartage is reportedly in talks with a private
equity about taking over the fleet.

While he maintains that historically trucking hasn’t been a good fit for private equity firms, Walter Spracklin of RBC published a report that identifies which trucking trusts, if any, would be the next most likely candidates for further consolidation in the freight transportation market.

Companies that are mainly based on their niche market segment, characterized by higher barriers to entry, have an attractive asset base, better pricing discipline, and higher margins make the most sense.

On that note, Spracklin concludes that ATS Andlauer’s lack of debt and solid customer contacts in the pharmaceutical sector, as well as Trimac’s base of long-term, high-margin bulk contracts, make the carriers the top two attractions to a private equity buyer.

“If private equity involvement extends over into the trucking space for whatever reason, this would likely result in an unexpected lift in trucking trust valuations,” writes Spracklin.

Big buyers like TransForce could run from acquisitions
after changes to how income trusts are taxed.

In a follow up interview with TodaysTrucking.com, Spracklin admits he was somewhat surprised over news that a private player is in the picture. “These are cyclical businesses and transportation does not give you a lot of flexibility through the cycle, which is very different from other trusts from a cash flow perspective.”

That said, the Canada Cartage news could mean there is indeed a market for private equity takeovers of “pure play” carriers in niche markets with very “sticky” customer contracts. While he does put trucking trusts like TransForce and Contrans on his list, he says their industry segments are more likely to make them targets of industry rivals — perhaps a larger U.S. carrier looking to establish a footprint in Canada — rather than a private equity.

As for future consolidations in the trucking sector, Spracklin confirms that the Oct. 31, 2006 announcement that the feds will tax income trusts like other corporations has resulted in a slowdown of acquisitions by trucking trusts, whose growth depends on cash flow.

“With the (Oct. 31 announcement) significantly impairing the growth that characterized the trucking trust industry, trusts are now subject to industry growth across all sectors, which right now is flat.”

That’s bad news for the growing number of aging, well-run private and family fleets with no succession plan. Many likely won’t get the cash-in-hand sort of offers that were available from trusts a couple years ago.

“If they happen, they’re going to happen on a much lower price than before,” says Spracklin. “They’re going to be a lot fewer because there’s no margin for error and you’re going to be a lot more selective. Every acquisition really counts now.”