Third-Party Logistics (3PL) Middle Market Valuation Primer

Industry Update by Harris Williams & Co.s Transportation & Logistics Group

Current industry and outsourcing dynamics in the third-party logistics (3PL) sector are driving hot and highly competitive transaction dynamics, particularly in the middle market. Continuing pressure on companies to source, manufacture, and distribute on a global basis has increased the complexity of supply chains, as well as the associated costs, driving companies to outsource critical logistics operations to specialized, third-party supply chain experts. As a result, the $100 billion 3PL market has experienced dramatic growth of approximately 15% per year over the last decade and shows no signs of slowing down. Many experts within the industry have observed that only 10% of logistics services are currently outsourced in the U.S. and believe that the U.S. will transition to a model more similar to that of European countries, where approximately 40% of logistics services are outsourced to 3PL service providers. These trends have spurred significant M&A activity by strategic buyers as well as private equity groups who recognize continued outsourcing to 3PL service providers will propel growth into the future.

The 3PL industry is closely tied to the trucking industry, with many companies offering a combination of services from both sectors. Both industries have been experiencing significant M&A activity over the past several years and numerous transactions have already been announced in 2007, including the pending $2.1 billion acquisition of EGL by CEVA, a portfolio company of Apollo.

Overview of Recent 3PL & Trucking Transactions

Target EGL Jacobson Companies Swift Transportation World Super Services Inmar Gemini Traffic Sales Madison Freight Systems Pro-Am Transportation Greatwide Logistics FMI International LLC PJAX Freight System Arnold Logistics Star Transportation TNT Logistics Watkins Motor Lines Panther Expedited Services MHF Logistics Global Link Logistics Market Industries, Ltd. Transport Corp. of America BAX Global, Inc. ACR Logistics UK Ltd. Acquirer CEVA Logistics Oak Hill Capital Partners Jerry Moyes RoadLink USA New Mountain Capital Fenway Partners Saia, Inc. BNSF Logistics Investcorp International / Hicks Holdings LLC Maritime Logistics US Holdings Inc. Vitran Corp. Oak Hill Capital Partners Covenant Transport Apollo Management LP FedEx Corp. Fenway Partners Allied Capital Golden Gate Logistics, LLC UTi Worldwide Goldner Hawn Deutsche Bahn AG Kuehne + Nagel Date Pending Jun-07 May-07 Apr-07 Apr-07 Feb-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Oct-06 Sep-06 Aug-06 Jun-06 Jun-06 Jun-06 Jun-06 Mar-06 Feb-06 Jan-06 Jan-06 Target Descriptions Leading provider of supply chain solutions. Provides third-party logistics and warehousing services in the United States. National TL carrier. Provider of outsourced warehouse services. Provides technology-driven logistics management solutions. Regional LTL and nationwide TL carrier. Regional LTL carrier. Transportation broker. Provider of trucking and managed warehousing services. Logistics provider for apparel, retail, and footwear industries. Provider of trucking services. Designs and implements supply chain solutions. Truckload carrier. Provider of supply chain management solutions. Less-than-truckload carrier. Provider of time critical transportation services. Provider of trucking, rail transportation, warehousing services. Provider of international freight forwarding and customs brokerage services. Provides trucking, logistics, and transportation brokerage services. Provides truckload carriage and logistics services. Supply chain solutions and transportation management. Provides logistics and warehousing services.

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Valuation multiples across these industries vary dramatically.

Within the 3PL industry, the leading truck

brokerage company (C.H. Robinson) trades for approximately 16x its trailing twelve month (TTM) EBITDA. Similarly, the leading freight forwarder (Expeditors Intl. of Washington) trades for approximately 19x TTM EBITDA. Conversely, in the trucking industry, leading truckload (TL) carriers like Heartland Express and J.B. Hunt trade for approximately 8x TTM EBITDA. Private company valuations evidence similar disparities, as a freight forwarding business might trade for 10x EBITDA while TL carriers trade for 4-5x EBITDA and LTL carriers trade for 5-7x EBITDA. What drives this enormous gap in multiples for companies ostensibly serving similar markets? And more importantly, how do the private markets value businesses offering a combination of these services?

Our experience shows there are two primary valuation drivers in the industry: the nature of the companys service offering and the asset-intensity of its business model. The impact of these factors on valuation is summarized in the following matrix, and both attributes are discussed in more detail below.

The HW&Co. 3PL Valuation Matrix1 TEV/EBITDA Multiples in the Middle Market
Supply Chain / Transportation Management ("3PL Oriented") Transportation Management & Warehousing Characteristics: Fixed Assets (i.e. Trucks/Warehouses/Specialized Handling Equipment) Nature of Service Brokerage, Freight Forwarding, Contract Logistics Characteristics: No Assets, Utilize 3rd Party Suppliers

6.5x to 9.0x
Asset-Heavy Traditional Less-than-Truckload (LTL) and Truckload (TL) Carriers Characteristics: Assets (Trucks)

8.5x to 14.0x
Asset-Light Trucking Carriers Characteristics: Mix of Company-Owned Trucks and Independent Contractors

4.0x to 6.0x

5.0x to 8.0x

Carriers ("Trucking Oriented") Asset-Intensity

(1) The representative public companies do not accurately reflect the current valuations that similar middle market companies are achieving; rather they are meant to serve as analogous business models with similar capital requirements.

Nature of Service Offering As shown in the matrix above, with an increase in demand for services, the extent and nature of the services provided by companies today under the 3PL umbrella is expansive. At the highest level (and on the top end of the

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spectrum), there are supply chain and transportation management companies, or traditional 3PL companies, that effectively manage some or all aspects of a companys logistics needs, whether it is the transportation, warehousing, or distribution of its goods. This category is inclusive of truck brokerage and freight-forwarding companies that utilize third-party suppliers (such as trucking carriers) to control the flow of goods from point A to point B, as well as warehouse service providers that provide specialized environments and services to control and manage inventory within the supply chain. These traditional 3PL service providers effectively operate as

distributors of transportation services without regard to the mode of transportation (truck, rail, plane, etc.). They can enhance their value-add by deepening those aspects of their customers supply chains which they manage. Most sophisticated 3PL providers will often influence production schedules, production lot sizes, routing, or even manage a customers entire supply chain. On the other end of the spectrum, there are trucking based platforms that are primarily focused on transporting goods from point A to point B. Although these operations are not true 3PL companies, they are pivotal in the day-to-day operations of the industry as they serve as the suppliers to the supply chain and transportation management companies and are charged with providing the actual service of getting goods from point A to point B. It can be challenging to determine to which category a company belongs, but in general, if a majority of the companys revenue is generated from trucking services, they should fall on the bottom half of the matrix. Given the hot nature of traditional 3PL deals, a fair number of trucking companies are actively repositioning their services to align more with the service offerings of traditional 3PL service providers. Be careful though - many of these trucking companies have simply changed their names from Company A Trucking to Company A Logistics without adding additional value added services and should fall short of premium valuation multiples that are being paid for traditional 3PL service providers.

Why do trucking companies trade at lower valuations than third party logistics providers? 1. Perceived Commoditization of the Service. 2. Significant Driver Shortages. 3. Energy Price Concerns. 4. Higher Capital Expenditure Requirements. 5. Strict Government Regulation. 6. Unionization (in some cases).
Asset-Intensity The second dimension, asset-intensity, relates to the capital requirements of the business. For example, trucking carriers that hire their own drivers and purchase (or lease) their own trucks are considered asset-heavy due to the recurring high capital requirements needed to maintain and grow their business. On the other hand, asset-light and non-asset based 3PL providers utilize the assets of third-party providers to maintain and grow their business

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and have modest annual capital expenditure requirements. Asset-light business models generate higher valuations within the market due to the better free cash flow characteristics and the operating flexibility derived from leveraging third-party assets. As a good rule of thumb, a company transitions from asset-heavy to asset-light when annual capital expenditure requirements are less than 25% of the companys EBITDA. At this threshold point, we would consider the company to be moderately asset-intensive. Other Considerations What moves valuation within each quadrant of the matrix? Several other factors will influence valuation levels, including (i) regional versus national infrastructure, (ii) specialization of the services, (iii) end markets served, (iv) market position, (v) customer concentration, (vi) stickiness of the customer base, (vii) level of value add of the service offering, (viii) sophistication of the IT platform, and (ix) degree of integration of services. In extreme cases, these variables can even push valuation outside of the stated ranges. We welcome inquiries regarding valuation and strategy specific to your 3PL business. - Bram Hall, Joe Conner, Will Kilpatrick, and John Wright. For questions about third-party logistics or other transportation sectors, please call Bram or Joe at 804-648-0072. Harris Williams & Co. (www.harriswilliams.com), a member of The PNC Financial Services Group, Inc. (NYSE:PNC), is one of the largest mergers and acquisitions advisory firms in the country focused exclusively on the middle market. With offices in Richmond, San Francisco, Boston, Philadelphia, and Minneapolis, Harris Williams & Co. represents private equity groups as well as publicly and privately held companies worldwide. Harris Williams & Co. is the trade name for Harris Williams, LLC and a registered broker-dealer. Member NASD/SIPC. Bram C. Hall, Managing Director of Harris Williams & Co., heads the firms Transportation & Logistics Group. Mr. Hall and his team have been among the most active advisors in the 3PL industry in the past two years. Other areas of focus within the T&L Group include air services, rail services, and automotive aftermarket distributors, manufacturers, and suppliers.