Report suggests USA Truck could again face a takeover attempt (Updated)

Editor’s note: Story updated to include response from USA Truck CEO James Reed.
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Van Buren-based USA Truck has successfully fought off two hostile takeover attempts in the past five years. It could face another acquisition attempt in 2017.

Brad Delco, a lead transportation industry analyst for Little Rock-based Stephens Inc., believes factors in the truckload industry are shaping up for consolidation, with USA Truck and Indianapolis-based Celadon as “likely targets.”

An acquisition of publicly held USA Truck – hostile or otherwise – could result in a tough economic blow for the Fort Smith metro economy. An estimated 400-500 people are employed at the company’s Van Buren headquarters.

Celadon – coincidentally, the other company now noted as a possible takeover target – in 2011 asked USA Truck management to meet about a possible transaction. At the time Celadon had purchased $4.66 million in USA Truck shares, or almost 6.3% of the company. USA Truck officials rejected the request, and Celadon moved to an easier target.

In September 2013, Phoenix, Ariz.-based Knight Transportation went public with a $9 per share bid as part of a $242 million deal to acquire USA Truck. The per share bid was a 39% premium from USA Truck’s share price a few days prior to Knight’s public move. After a lengthy legal battle that cost the company more than $2.1 million, USA Truck was successful in avoiding a hostile takeover.

A THIRD TAKEOVER ATTEMPT?
Delco, along with associate analyst Scott Schoenhaus, believe efforts to reduce capacity (number of trucks, trailers and other equipment) in the truckload sector and changes likely to happen with federal enforcement of electronic truck logs suggest “industry consolidation could be a central theme in the industry over the next several years.”

“Early signs of improving freight fundamentals, combined with our well published view that the enforcement of the ELD (electronic logs) mandate will force industry consolidation, set the stage for such events to occur in the near-to-mid-term,” noted the Stephens report. “We believe the key attributes of takeout targets on our coverage list include 1) discounted relative valuations, 2) minimal insider ownership and 3) relative operational under performance. We believe CGI (Celadon) and USAK (USA Truck) almost perfectly line up with these attributes which we describe in more detail in the note.”

Delco and Schoenhaus said the “appropriate takeout range” for Celadon is between $11 and $16 per share, and between $9 and $13 per share for USA Truck.

USA Truck shares (NASDAQ: USAK) closed Tuesday at $9.51, up 23 cents. The shares were approaching $10 per share in early afternoon trading on Wednesday. During the past 52 weeks the share price has ranged from a $21.46 high to a $6.85 low. Celadon shares (NYSE: CGI) closed Tuesday at $8.05, down 50 cents, and was also trading higher Wednesday. During the past 52 weeks the Celadon share price has ranged from a $12.03 high to a $4.85 low.

USA Truck reported fourth quarter and full year financials Feb. 7, with the full year numbers including a $5.3 million loss tied to “restructuring, impairment and other costs.” The per share loss for the year was 90 cents. The 2016 loss is a wide swing from 2015. USA Truck ended 2015 on a high note, with full year 2015 net income reaching $11.069 million, up 76.1% compared to 2014 net income. It was the second consecutive year of growth for a company that has struggled since the Great Recession.

Updated info: James Reed, CEO of USA Truck, said managers of all companies have to daily determine the best outcome for shareholders, but said the company has “great operational upside” with industry “tailwinds that should help us in price and productivity.” He said management is “100% focused on fixing the company and returning it to high operational performance,” and predicted the company would be back in the financial black in the first half of the year.

While not directly disputing the takeover suggestion, Reed said the “best and highest use of our resources” is to let management take advantage of the positive trucking industry trends Delco noted the report, and return the company to profitability.

POSSIBLE PURCHASE PRICES, INSIDER FACTOR
Delco and Schoenhaus believe the two trucking companies would “garner a price above currently market levels,” with the price largely determined by used truck market values, “synergy opportunity” for the acquirer, and confidence by the acquirer that truckload sector fundamentals would continue to improve.

The two analysts suggest USA Truck and Celadon each have “at least $10 million of corporate/public company cost synergies available to a strategic buyer.” Such synergies create value for shareholders, they said.

“(W)e believe relative operational underperformance creates an opportunity for the purchaser to create value for its shareholders, while also taking advantage of a target’s fatigued investor base,” Delco and Schoenhaus wrote, adding that USA Truck and Celadon “possess all of these key attributes.”

They also noted that the relative low percentage of insider ownership makes USA Truck and Celadon easier to acquire. Publicly traded companies with “founding families” still at the helm and owning much of the company are historically difficult to acquire through hostile means.

“This is important to note as companies with high insider ownership have a greater say in what strategic direction they choose to take the Company, as well as a greater defense against takeover attempts from outside buyers due to their ownership percentage and corresponding voting control. In regards to our analysis of CGI and USAK, both companies have the lowest percentage of voting control by insiders amongst our truckload coverage universe, with 3% and 8% of shares outstanding respectively,” according to Delco and Schoenhaus.

To that point, key insiders at USA Truck have in recent weeks boosted their share holdings. USA Truck Board Chairman Robert Peiser purchased 6,000 shares for a trust fund that now owns 27,272 shares. He directly holds 30,513 shares. James Craig, chief commercial officer and executive vice president bought 29,000 shares, which increased his ownership to 82,442 shares. Peiser paid between $7.31 and $8.10 for the 6,000 shares, and Craig paid $7.85 per share.

(The research analyst principally responsible for preparation of the Stephens report has received compensation that is based on the firm’s overall revenue which includes investment banking revenue.)