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“Trucking is the primary means of serving the North American transportation market and hauls approximately 70% of freight volume within the United States, which is embodied in a common phrase used within our industry: ‘if you’ve got it, a truck brought it’ – Schneider National S-1 filing, 22 December.
The launch of the initial public offering of US trucking broker and 3PL Schneider National could be just around the corner – investors should closely watch how the deal fares, as it could set a benchmark both in terms of market appetite and valuations across the equity capital markets.
In case you missed it, the preliminary IPO prospectus was filed just before Christmas, and didn’t receive much attention during the holiday season – not necessarily a bad thing, given the coverage it received.
On 22 December, news agency Reuters reported that Schneider had filed for an IPO of up to $100 million – which, in fact, is the “proposed maximum aggregate offering price” rather than the cash it will seek to raise from investors.
In September, all the main news outlets, including CNBC, quoted another Reuters story, in which sources indicated that the IPO could be worth $700m, based on the listing of a partial equity stake, giving it a value of “as much as $5bn, including debt”.
My sources wouldn’t comment at that stage on the nitty-gritty of the financials. However, not only is that price tag realistic, based on my fair value estimate for Schneider’s equity, but also the net present value of cash flows and a sum of the parts analysis (where Schneider’s truckload, intermodal, logistics activities are gauged and valued as standalone entities) both suggest that such a sizeable deal is surely do-able.
An enterprise value of $5bn implies an equity value of about $4.4bn and a share price of $88, assuming, say, 50 million shares outstanding, based on a hypothetical post-money valuation.
If the amount being raised is actually between $500m and $1bn, then also consider that seven banks are underwriting the deal. So, the execution risk associated to the actual allocation in the primary market would likely be minimal.
The float could be wrapped up by Easter, I gather, when the financial market could well be a tougher place than today.
An equity ticket of about $100m for each underwriter is small change at a time when the banks are willing to take a $1bn exposure to Argentina, by lending it multi-currency bonds in the form of a bridge financing that could end up being a bridge to nowhere for South America’s second largest economy.
In a world where the first symptoms of malaise in global trades are visible, the price of gold as well as recent trends for the Japanese yen and bond prices – both have greatly depreciated – remind us that the window for IPOs could shut overnight. However, Schneider offers plenty of reassurance, given stable cash flows, a solid balance sheet and mildly encouraging growth prospects, not only for revenues and earnings.
While flagging a two-tier ownership structure, which is a key element of the offering, it noted in the prospectus that it “paid annual dividends of $4.01 per share of redeemable Class A common stock and Class B common stock in fiscal year 2014, $4.85 per share of redeemable Class A common stock and Class B common stock in fiscal year 2015 and $6.00 per share of redeemable Class A common stock and Class B common stock on December 15, 2016”.
(For the record, shares of Class A common stock are entitled to ten votes per share; shares of Class B common stock are entitled to one vote per share.)
The A/B shareholding structure, where the Schneider Voting Trust will retain control of Schneider via class A common stock, is not something I like very much, while other details are still sketchy.
Take this, for example: “We are selling shares of our Class B common stock and the selling shareholders identified in this prospectus are selling shares of our Class B common stock. We will not receive any proceeds from the sale of shares being sold by the selling shareholders. This is our initial public offering and no public market exists for our Class B common stock.”
In a difficult trucking industry, Schneider boasts really impressive figures.
As it also said in its filing: “Our portfolio consists of approximately 10,800 company and 2,800 owner-operator trucks, 38,400 trailers and 18,000 intermodal containers across North America and approximately 19,300 enterprise associates. We serve a diverse customer base across multiple industries and serve approximately 10,000 customers, including more than 200 Fortune 500 companies.”
It added: “Each day, our freight moves more than 8.8 million miles, equivalent to circling the globe approximately 350 times. Our logistics business manages over 20,000 qualified carrier relationships and, in 2015, managed approximately $2bn of third-party freight.”
In addition, peak demand is manageable, and has established a network of facilities across North America “in order to maximise the geographic reach of our company trucks and owner-operators and provide maintenance services and personal amenities for our drivers”.
The trading multiples of some of its competitors, stateside, such as JB Hunt, Knight Transportation, Hearthland Express, indicate that its enterprise value could easily range between $4.5bn and $5bn once the deal is completed.
Clearly, the low end of that range would be particularly appealing for value hunters – and is also conceivable, given the typical discount at IPO, that should help the deal get traction among investors.
Despite a shortage of qualified drivers, this is an easy story to commit to for them, in my view. After all, as Schneider argues in the S-1, trucking continues “to attract shippers due to the mode’s cost advantages relative to air transportation and flexibility relative to rail”.
Easy peasy, then?
Volatility, as gauged by the VIX Index, is at multi-year lows, which undoubtedly makes it a good time to pursue a public float. Moreover, Schneider is likely to continue to err on the side of caution and play it safe in terms of corporate strategy, as proved by its capital allocation and how it has communicated its intention to investors since the second half of 2016.
Finally, while some bankers argue that President-elect Trump will pump up the equity capital markets this year after a poor stint in 2016, there equally remain unequivocal signs that riskier assets could be seriously overpriced. So I cannot refrain from pointing out a slim chance that the IPO could be pulled from the market if risk-off trades come back to haunt us before Easter.