Intermodal marketing giant Hub Group demonstrated its faith in the economic recovery last week with the $83 million acquisition of Exel Transportation Services.
The acquisition expands Hub Group’s reach into intermodal and trucking markets throughout the U.S. and will bring its annual revenue to more than $2.5 billion.
Hub Group and its new subsidiary will control 20 percent of the domestic intermodal market, more than $1 billion in shipper truckload spending and $250 million in less-than-truckload revenue, Chairman and CEO David Yeager said.
The non-asset company’s services “are very complementary to Hub’s and will give us more scale,” Yeager told Wall Street analysts in an April 4 conference call.
“This is an excellent fit for Hub Group’s core intermodal and truck brokerage businesses,” Longbow Research Analyst J. Douglas Woodrich said in a note to investors. The former Exel unit “should benefit from improved operating margins through access to Hub capacity,” he said. “Hub should obtain better utilization of its fleet and higher density, allowing for more efficient drayage.”
The sale of $717 million Exel Transportation also marks a further retreat from domestic U.S. freight transportation at Deutsche Post DHL, which withdrew from the domestic express delivery market two years ago to focus on international business.
The acquisition is expected to add about $550 million to $600 million to Hub’s top line in 2011. Exel Transportation increased sales 16 percent in 2010, Hub said.
Exel Transportation was the freight brokerage arm of Wilmington, Ohio-based contract logistics provider Exel, which remains a unit of Deutsche Post DHL.
Hub Group renamed the former DP unit Mode Transportation. President Jim Dannan and other key Exel officers will stay with the new Hub Group subsidiary.
The acquisition extends Hub’s intermodal, truckload and LTL reach, and adds a refrigerated transportation subsidiary, Temstar, in Lombard, Ill.
“This is exactly the kind of acquisition we’ve been patiently awaiting,” Yeager said. “Mode’s been on our short list for quite some time, and we’re very excited that we prevailed in the competitive bidding process.”
The competitiveness of that bidding process underscores growing demand for freight services and shipper anxiety about the availability of domestic capacity.
“We believe that for both the over-the-road and intermodal space we’re going to see a constrained capacity environment” in 2011, Mark Yeager, vice chairman and president of Hub Group, told The Journal of Commerce. “Those that can produce capacity will have a competitive advantage.”
The deal is the latest in a series of U.S. logistics acquisitions that track the progress of an industrial recovery while U.S. truck capacity shrinks.
The U.S. economy added 17,000 manufacturing jobs in March, part of a 216,000-job gain, according to the Bureau of Labor Statistics, and a 16.9 percent increase in automotive sales kick-started production lines along supply chains.
With truckload capacity tight and LTL capacity shrinking, shippers are expected to turn to third-party logistics companies, truck brokers and intermodal marketers to secure scarce freight-hauling capacity as demand rises.
“Intermodal capacity will be a critical issue into 2011 and beyond,” Mark Yeager said. Hub will purchase another 1,000 domestic containers this year, for a total of 4,000 containers, to ensure it has capacity. That’s a 21 percent increase in its total container fleet, to about 21,000.
“We didn’t want to make this acquisition and then not have capacity” to handle more business in the peak shipping season, he said.
Mode Transportation itself is a non-asset company, with a network of 300 independent business operators, or IBOs, throughout North America. It will operate autonomously, Mark and David Yeager said. “We’re undertaking this transaction because of the (IBO) business model, not in spite of it,” said Mark Yeager. “We like the concept of having a strong third-party agent network.”
Hub expects “transportation synergies” from the acquisition to flow in both directions. Mode will give Hub’s truck operations a boost, especially with smaller to midsize shippers. “This is an area where Hub lacks reach,” David Yeager said.
Mode comes with a subsidiary of its own, Temstar, a temperature-controlled intermodal carrier with 500 trailers. Refrigerated freight is “one market Hub has wanted to enter for quite some time,” David Yeager said.
As a Hub subsidiary, Mode will be able to tap the company’s extensive drayage network. “They’ve been challenged on the intermodal side as margins compress due to the fact that they’ve not been able to access capacity,” Mark Yeager said.
Contact William B. Cassidy at email@example.com.