USA Truck faces another takeover attempt (Updated II)

Van Buren-based USA Truck faces a second takeover attempt in less than two years, with Knight Transportation on Thursday morning going public with a $9 per share bid as part of a $242 million deal. USA Truck officials accused Knight of misleading the public about recent communications between the two companies.

Phoenix, Ariz.-based Knight employs more than 5,000 and operates more than 4,000 trucks and is one of the nation’s largest truckload companies. By comparison, USA Truck has under 3,000 employees and operates around 2,200 trucks.

Knight also owns 8% of USA Truck shares.

The per share bid is a 39% premium from USA Truck’s share price (NASDAQ: USAK) on Sept. 25, and a 58% premium compared to the Aug. 27 closing price – the day before Knight sent its first proposal letter to the USA Truck Board of Directors.

UPDATED INFO: USA Truck shares opened strong Thursday following the Knight bid news. The opening bell bid was $9, with the shares trading at $9.10, or up almost 41% over Wednesday’s closing price of $6.46. By early afternoon, the share price had moderated back to $8.75, which was a more than 35% increase from the previous closing price. The price closed the day at $8.80, up $2.34.

“We are confident that USA Truck shareholders will share our strong belief that Knight's $9.00 per share all-cash, premium proposal would provide significant and immediate cash value that is significantly more attractive than USA Truck's standalone prospects,” Kevin Knight, Board chairman and CEO of Knight, said in Thursday’s statement. “For Knight's shareholders, we are confident that a combination with USA Truck would create value by further enhancing our position as a leading provider of multiple truckload transportation services in North America.”

At risk in a deal with Knight would be the more than 400 jobs at USA Truck’s corporate headquarters in Van Buren.

Brad Delco, a transportation industry research analyst with Stephens Inc., said the Knight bid was a substantial premium over the USA Truck stock price, but is below the $10.25 per share book value.

UPDATED INFO: In a statement released late Thursday, USA Truck said the Knight offer of $9 per share "substantially undervalues" the company. On Sept. 6 USA Truck sent a letter say it rejected the offer and was willing to meet with Knight to explain why the $9 per share was not enough.

"Surprisingly, on September 13, 2013, Knight rejected the Company’s offer to meet and informed USA Truck that it saw no point in engaging in further transaction discussions with USA Truck at that time," USA Truck noted in its statement. (See the complete USA Truck statement at the end of this article.)

The Thursday statement from Knight and the Aug. 28 letter from Knight to the USA Truck Board included several reasons the move is good for shareholders of both companies.
• “Our proposal would provide your shareholders with immediate liquidity for their shares at an attractive price, without being subject to the significant execution risk associated with your current turnaround plan. We would note that although the Company's operational performance has improved, the Company's operating ratio remains above 100%, its book value continues to fall, and the share volume remains quite limited, making it difficult for your shareholders to achieve liquidity.”

• “We believe there would be no impediment to completing a transaction on an expedited basis. Based on discussions we have had with our potential financing sources, we are confident that we would be able to readily obtain the financing necessary to complete a transaction. As such, our proposal is not subject to any financing contingency. Moreover, based on our knowledge of the trucking industry, we do not believe there would be any antitrust impediment to completing a transaction.”

• “Knight and USA Truck operate in complementary service lines, both with young tractor fleets with similar average lengths of haul.”

• “Knight believes that it can improve operational efficiencies at USA Truck – and do so more quickly than the USA Truck management team can alone.”

• “Knight can finance USA Truck's capital needs on a lower cost basis.”

The Aug. 28 letter also leaves the door open for a higher price if the USA Truck Board allows Knight to look closer at company operations.

“Although we believe our proposal would provide full and fair value to your shareholders, we would be prepared to modestly increase our proposed purchase price if we were allowed to conduct due diligence and the Company were to demonstrate to us value that we have not already identified,” Kevin Knight noted in his letter.

Knight in his letter requested a Sept. 6 response from USA Truck.

“Absent a satisfactory response, we will consider all options available to us, including making your shareholders aware of our offer,” Knight wrote.

TAKEOVER HISTORY
Indianapolis-based Celadon, which operates Celadon Trucking, purchased $4.66 million in USA Truck shares in early October 2011. Company officials also asked to meet with the USA Truck management to “discuss a possible association” between the two companies.

USA Truck officials rejected the request, and Celadon moved to an easier target. Celadon officials sold the shares of USA Truck on Feb. 28, 2012, and on Feb. 29 announced it had “purchased a significant portion of the operating equipment of Teton Transportation, Inc.”

In November 2012 the USA Truck Board adopted a “poison pill” provision to buffer the company from future unsolicited offers.

The plan caps ownership acquisition at 15% and leaves the cap in place for two years “to afford the Company time to implement its turnaround strategy.” The plan also puts in place a 10-day “redemption period” that gives USA Truck officials “the opportunity to negotiate” with anyone who seeks to buy shares beyond the 15% cap.

In addition to the poison pill, the USA Truck Board hired in February veteran trucking exec John Simone to replace Cliff Beckham as CEO. Simone has more than 30 years of operational and management experience in the transportation industry with leading companies that include UPS, Ryder, and Greatwide Logistics. He was the CEO of LinkAmerica where he led a successful operational turnaround.

TROUBLED FINANCIALS
USA Truck reported July 24 a first half 2013 loss of $3.5 million, better than the $8.4 million for the same period of 2012.

A second quarter loss of $1 million was booked, but was an improvement over a $3.5 million loss during the second quarter of 2012. The per share loss of 10 cents, however, missed the consensus analyst estimate of a 6 cent per share loss.

Total revenue for the first six months of 2013 reached $271.766 million, up 7.3% compared to the 2012 period. Second quarter total revenue was $139.738 million, up 7.84% over the second quarter of 2012.

Significant financial gains will be required in the second half of 2013 if the company is to avoid five consecutive years of losses. The company reported a $17.54 million loss for 2012, a 2011 net income loss of $10.77 million, a 2010 loss of $3.308 million, and a $7.177 million loss in 2009.

During the third quarter of 2012, the company was forced to negotiate for a new credit line. The new agreement, made with Wells Fargo Capital Finance and PNC Bank, placed all assets of the company up as collateral for a new $125 million revolving credit agreement. Of that, USA Truck had initial access to $28.3 million, with $75.9 million repaying the obligation of the previous credit agreement.

STATEMENT FROM USA TRUCK
USA Truck, Inc. (NASDAQ: USAK), a leading truckload transportation company, today said its Board of Directors had previously reviewed Knight Transportation’s unsolicited proposal with USA Truck’s management team and financial and legal advisors, and unanimously concluded that the proposal substantially undervalues USA Truck and is not in the best interests of USA Truck and its shareholders.

In light of our previous discussions with Knight, we are disappointed not only that Knight decided to make its proposal public this morning, but did so in a misleading manner. In fact, on September 6, 2013, the Company responded to Knight’s letter dated August 28, 2013 informing Knight that the Board of Directors unanimously viewed Knight’s $9.00 per share proposal as inadequate, as it substantially undervalued USA Truck in light of the initiatives undertaken by our new management team. However, the Company offered to meet with Knight to discuss the reasons why the Company viewed Knight’s proposal as inadequate. Surprisingly, on September 13, 2013, Knight rejected the Company’s offer to meet and informed USA Truck that it saw no point in engaging in further transaction discussions with USA Truck at that time.

While the Company remains open to all strategic options, including further discussions with Knight, we believe that executing our strategic plan will offer superior value to our shareholders.