Knight Transportation one hungry firm
Resistant USA Truck is latest of Phoenix-based carrier’s acquisition targets
Knight Transportation, considered one of the transportation industry’s top performers, has a market capitalization valued at $1.3 billion with facilities located in more than half of the contiguous United States. Revenue grew by more than 8 percent from 2011 to 2012, and for 15 consecutive years it was recognized as one of Forbes’ Top 200 small companies.
Building through buying has been key in that success.
Incorporated as a familyowned business in 1989, taken public in 1994 and now nearing $1 billion in annual revenue, Knight Transportation has shown a willingness to buy out smaller rivals. Since 1999 the Phoenixbased firm has acquired four companies, a move that has helped further Knight’s mission of becoming a national carrier.
Action Delivery Service Inc. of Corsicanna, Texas, was acquired in 1999 for a $2 million stake in Knight Transportation. John Fayard Fast Freight Inc. of Gulfport, Miss., was absorbed in 2000, and Edwards Bros. Inc. of Idaho Falls, Idaho, sold to Knight Transportation in 2005. Terms of those deals were not disclosed. Roads West Transportation Inc. of Phoenix was bought out in 2006 in a deal valued at about $16 million.
USA Truck of Van Buren has emerged as the most recent, and likely the largest, Knight target. Officials at USA Truck, one of the 17 largest publicly traded com-
panies in Arkansas, turned down a deal valued at $242 million.
Neither company made officials available for comment.
While a specific target wasn’t mentioned, Knight made its interest in a potential merger known in its 2012 annual report for shareholders. Listed among a fivepoint approach for continued growth is an entry titled “Opportunities to make selected acquisitions.”
“We are regularly evaluating acquisition opportunities,” the annual report explained to shareholders. “Since 1999, we have acquired four short-to-medium haul truckload carriers or have acquired substantially all of the trucking assets of such carriers. Although our primary focus for growth is internal, we continue to evaluate acquisition opportunities.”
Through a news release and Securities Exchange Commission filings two weeks ago, Knight announced its desire to acquire USA Truck. That was followed by a public response from USA Truck rebuffing the interest and then a flurry of stock purchases by Knight as it increased its stake in USA Truck to 1,287,782 shares. Now Knight, which began the month with an 8.3 percent stake in its rival, is believed to be the largest individual shareholder in USA Truck at close to 12 percent.
On Thursday, USA Truck filed a breach-of-contract lawsuit against Knight in Crawford County Circuit Court alleging “irreparable harm” to the company and its stockholders. Information used to shape Knight Transportation’s recent offer was obtained, the suit alleges, in a February 2012 meeting that included the signing of a two-year confidentiality agreement. That agreement, a copy of which is included in the filing, prohibited mentioning “even the existence of ” discussions. Knight Transportation officials, according to the filing, “unlawfully” used information as part of a “scheme to acquire USA Truck for less than its full value.”
USA Truck is seeking injunctive relief that would require Knight Transportation to return nearly 400,000 recently purchased shares.
“When USA Truck said that it was not interested, [Knight] bought more shares, and the clear message was ‘We’re going to make a play for the business whether you like it or not,’” said Trey Mamo, a co-founder at EVE Partners, an Atlanta investmentbanking firm that specializes in trucking and logistics. “It’s clear that this is thought out and that Knight is going to take it to the logical conclusion, which is either acquiring the company through hostile means or convincing the current management to capitulate and sell the company.”
Despite abundant assets — more than 2,000 trucks in service, 21 facilities nationwide and 2,990 employees — USA Truck is perceived as an underperforming carrier. In 2011 and 2012, USA Truck reported more than $30 million in losses. USA Truck has announced a new CEO and board chairman within the last year.
Also of interest are USA Truck’s areas of service. The company bills itself as an international carrier thanks to business in Canada and Mexico, and its domestic trucking lanes are viewed as beneficial to Knight, which opened a Springdale office for its refrigerated division in April and currently is hiring drivers. Acquiring USA Truck would allow Knight to greatly ramp up its presence in middle America.
“While Knight has solid geographic coverage across the United States, it is particularly strong on the west coast and we believe USA Truck’s strength in the South and Midwest would strengthen Knight’s overall presence while providing more trucks to gain scale,” transportation analysts at financial services firm William Blair said in a recent report.
Analysts at Cowen and Co. LLC described the situation as an “uphill battle” for Knight.
USA Truck co-founders and former company heads James Speed and Robert Powell hold a combined 1.88 million shares and have traditionally been opposed to selling. Together they own close to 17 percent of the company, and if the two have little interest in selling, influencing other shareholders could be difficult.
Knight’s bid is the third takeover attempt of USA Truck to become public in the last 10 years. Most recently the firm fought off a takeover attempt by Celadon in October 2011. Celadon once owned more than 650,000 shares in USA Truck but now owns zero.
“Considering over 17 percent of shares are owned by two founding insiders who appear opposed to the deal just as they were to the Celadon one, we believe [Knight] will not have the easiest of times trying to carry out a friendly merger and may find itself resorting to a hostile takeover,” the Cowen and Company report said.
Further complicating the process for Knight is the November 2012 implementation by USA Truck’s board of a shareholders-rights plan, commonly known as a poison pill. Companies looking to ward off unwanted suitors can opt to put a poison pill in place, and USA Truck did so around the same time that Robert Peiser was announced as board president last year.
USA Truck’s poison pill kicks in once an individual takes more than a 15 percent stake in the company.
If Knight or another party were to reach the 15 percent threshold, USA Truck can activate provisions that essentially make ownership of the company less valuable. Included is the potential for USA Truck to offer shareholders, with the exception of the 15 percent stakeholder, additional shares of common stock at half-price.
Difficulties associated with potential takeovers are not new to officials at Knight Transportation and are a reality they acknowledged in the 2012 annual report.
“There is no assurance that we will be successful in identifying, negotiating, or consummating any future acquisitions,” the report reads. “… If we make acquisitions in the future, we cannot guarantee that we will be able to successfully integrate the acquired companies or assets into our business.”
Despite the challenges, a simple solution remains — assuming USA Truck is willing to listen if Knight Transportation sweetens the pot.
USA Truck deemed an initial offer of $95 million paid for outstanding shares and Knight’s assumption of $147 million in debt as being unfavorable to its shareholders. Knight CEO and board chairman Kevin P. Knight acknowledged in an Aug. 28 letter to the USA Truck board of directors that it would be willing to “modestly increase our proposed purchase price” under certain conditions.
EVE Partners’ Mamo said USA Truck shareholders should use a big-picture approach when evaluating company worth.
“You expect the seller, even if the initial offer was $1 million a share, to say no,” Mamo said. “I don’t see how you make an argument to your current stockholders that the current management team can do better based on what has been offered. [Stockholders] know exactly what Knight’s offer was. The question is, how does the stock have to perform over the next two to three years to equal as much value as the cash offer you have in front of you?”