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The fragmentation of the logistics industry overall drives M&A activity, says Lentz, transportation and logistics managing director at G2 Capital Advisors. "Even the biggest of the big don’t represent a large fraction of the industry," he says.
As an example, Lentz points to the rapid growth of XPO Logistics, which now is the largest 3PL in the U.S., reporting revenue of $9.5bn. "XPO is big, but even at $9.5bn it represents maybe 5 percent of the U.S. market," he says.
Add to fragmentation the strong U.S. dollar and the influx of money from private equity groups, family funds, and foreign investments and you have a great opportunity to consolidate segments inside the industry, Lentz says. He notes that M&A activity through the first two quarters of this year have outpaced all of last year for the 3PL industry. “I can’t wait to see what happens in Q3 and Q4.”
Typical deals have big companies buying middle-sized companies or two middle-sized companies merging, says Lentz. “The goal is to take one plus one and make it equal four or five. If you put together two 3PL companies that have ancillary and complementary services, you can create synergies and take out some back office costs.” He notes that the price or economic value of a company typically is based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). “If you take a $5m EBITDA company and couple it with another $5m EBITDA company, in two years instead of $10m EBITDA company you may have a $20m or $25m EBITDA company. Done right, enterprise value can explode.”
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