A Prelude to More J.B. Hunt Consolidation?

Merging its logistics division with those of five other major truckload carriers could be a prelude to further consolidation involving J.B. Hunt Transport Services Inc., a company official said last week.

“That’s certainly something that could come,” said Jerry Walton, Hunt vice president and chief financial officer.

Dan Moore, an industry analyst who follows the company for Stephens Inc. of Little Rock, was more direct.

“I think it will happen,” he said. “I think it’s just a matter of time.”

In March, the company combined J.B. Hunt Logistics, the division of the company that provides freight-brokering services to shippers and other carriers, with the logistics operations of Covenant Transport Inc. and U.S. Xpress Enterprises Inc., both of Chattanooga, Tenn.; M.S. Carriers Inc. of Memphis; Swift Transportation Co. Inc. of Phoenix; and Omaha, Neb.-based Werner Enterprises, Inc.

The result: Dallas-based Transplace.com, an Internet-driven “transportation supermarket,” offering shippers and carriers mega-purchasing power for transportation services and supplies. An initial public offering of stock in Transplace.com is planned for early 2001, according to Jun-Sheng Li, the company president.

Further merging of one or more of the companies with J.B. Hunt could create a trucking behemoth that would be positioned to dominate the volatile, ultracompetitive industry. According to Moore, that was the idea from the beginning.

“That’s what most people concluded when they first saw the announcement, that Transplace.com could pave the way for [merger] activity somewhere down the road,” he said.

Such consolidations could take place in one or two years, he said, “as they become more comfortable with each other.”

A letup in the fierce competition of the truckload industry could affect the companies’ thinking as well, Moore said. Many smaller carriers have failed or been absorbed in the past year as high fuel prices, interest rates and insurance premiums have ravaged truckers’ bottom lines. A better business environment could lessen the urgency for consolidation, Moore contends.

“It depends on how difficult the operating environment gets,” he said. “These publicly traded companies are going to try to seek ways to increase shareholder value.”

Further combinations among the six founding companies could lead to “significant synergies,” Moore said. “There’s certainly some interesting strategic opportunities for Hunt.”

Company Profiles

A brief look at the companies could be instructive in predicting who eats whom, Moore said.

“Deregulation took place in 1980,” he said. “Most of the people that run these companies today are, in fact, the entrepreneurs” who seized the initiative in the industry when the Carter administration ended federally mandated routes and cargoes.

“At some point, these entrepreneurs are going to at least consider exit strategies. Who has a succession strategy and who doesn’t?”

The Hunt entrepreneur, founder and senior chairman, J.B. Hunt, is 73 and owns more than 40 percent of the company’s stock. A complete management team is in place, including Walton, 53; CEO Kirk Thompson, 46; and chairman Wayne Garrison, 47. Hunt’s son, Bryan, 41, is vice chairman.

It makes an unlikely formula for a sell-off, in contrast to at least three of the six partners.

Covenant president and CEO David Parker, 42, has built the company from its founding 14 years ago. Across the street in Chattanooga, U.S. Xpress co-chairmen Patrick Quinn, 53, and Max Fuller, 47, share a similar story and time frame with Parker. And in Memphis, M.S. Carriers president and CEO Michael Starnes, 55, started with one truck 22 years ago.

“The different operating environment is going to force these companies to reconsider their long-term strategies,” Moore said. “We’ll likely see mergers, joint ventures, divesting of business, and reemployment of capital.”

Lowell-based Hunt is the nation’s largest publicly traded truckload, or long-haul, carrier, with more than $2 billion in revenue last year and almost 10,000 tractors. Only Schneider National of Green Bay, Wis., a privately held company, is larger.

Though the company’s official quarterly report has not yet been filed with the federal Securities and Exchange Commission, Hunt has announced favorable results for the quarter ended Sept. 30. Though revenue dropped 2.8 percent with the loss of the logistics business, the Arkansas company posted net earnings of $9.1 million, a bullish 82 percent gain over the 5 million earned in the same period of 1999.

J.B. Hunt Logistics contributed about 6 cents per share to third-quarter earnings last year, the company said, while Transplace.com added less than a cent.

This comes at a time when most trucking companies, including Hunt’s partners in Transplace.com, are struggling to meet last year’s numbers.

Hunt credited higher margins in dedicated contract hauling, combined with a lower effective income tax rate and fuel surcharges that largely offset dramatic increases in diesel prices, for the improved earnings.

J.B. Hunt stock, traded on the Nasdaq exchange, closed at a 52-week low of $10.50 on Oct. 12. The stock rallied following the latest earnings announcement Oct. 16, easing up to $12.69 on Oct. 25.

Hunt Transport’s Brainchild

Though Transplace.com is a six-way partnership, J.B Hunt Transport spearheaded its creation and dominates the management of the new company. Li, former head of J.B. Hunt Logistics and creator of the software operations at the heart of Transplace.com, serves as president and CEO.

Each company contributed $5 million and its logistics division to the new company, which resulted in Hunt leading the partnership with a 28 percent share, followed by Swift and Werner at 16 percent each, M.S. Carriers at 14 percent, and Covenant and U.S. Xpress at 13 percent each.

By June 30, each of the six companies had supplied, in the words of the subscription agreement, “all of the intangible assets of its transportation logistics businesses to [Transplace.com],” including contracts, software and software licenses, patents, trademarks, copyrights, Internet Web sites, “trade secrets, know-how, and other intellectual property.”

The agreement among the six companies includes a clause forbidding any of the founders from competing with Transplace.com for five years, or for two years in the event that the carrier withdraws from the partnership.

Li, a former vice president at Schneider’s logistics division, exchanged the rights he had to the “Dense Network Efficiency optimization computer algorithm,” his logistics software, for 4.5 percent ownership in Transplace.com.

The partnership, which has 550 employees in Dallas, completed its first quarter Sept. 30, and everyone’s optimistic.

“There [were] a lot of things that we had to do in terms of the customers … and carriers,” Li said. “If you look at it in terms of normal business operations, it’s just running as expected. Everything is going better than I had anticipated.

“This was considered a very daunting task. Many people even openly said that it was impossible to do.”

Transplace.com plans an initial public offering of stock early next year, Li said.

In Lowell, Walton echoed Li’s assessment, terming the venture’s first quarter exciting.

Customers trust Transplace.com because it is backed by the assets of major carriers, unlike many non-asset-based projects started this year, Walton said.

“The combination … backed by the assets … is very important to the customers. I think most of the shippers out there are as concerned about the capacity to move their freight than anything else.”

Hunt is counting on a Transplace.com IPO as well, Walton said.

“We’re anticipating that they’ll have a public offering within the next 12 months.”

Pundits Optimistic

The sunny assessments aren’t limited to J.B. Hunt partisans.

“Transplace.com … is considered by some industry insiders to be a leading contender in online logistics services,” wrote Alex Salkever in Business Week.

“If all goes according to plan, these sites will match shippers with cargo more efficiently and eliminate the mountain of paperwork,” Salkever wrote. “Moreover, sophisticated wireless communications equipment will soon allow the sites to interact in real time with their clients. Customers can check out what routes trucks are taking — and even the temperature of their containers — on a minute-by-minute basis. Industry experts say that this could cut losses by more than 30 percent.”

And fund manager Jerome Heppelmann recently increased his fund’s weighting in trucking stocks by boosting investment in Hunt, Covenant, U.S. Xpress and Swift, all Transplace.com partners.

“Does Heppelmann know something the rest of us don’t?” wrote Julia Boorstin in Fortune. “Maybe. He thinks the stocks can’t fall much further, and he’s betting that interest rates and gas prices are likely to drop.

“Then there’s Transplace.com, a joint venture of six trucking companies, including the four he owns [shares in]. Transplace launched July 1 and already has roughly $800 million in revenues. It’s scheduled to go public in 2001, and if it succeeds, Heppelmann said, two of his picks could double in market cap.”

It’s hard to beat the customer base Transplace.com started with. Li ticks off J.C. Penney, Weyerhaeuser, Auto Zone, Anheuser Busch, Pfizer and Circuit City as examples of shipper customers that one or more of the carriers brought to the mix. Transplace.com uses up to 5,000 carriers, Li said, adding that there was “a lot of overlap in terms of the carrier base.”