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Mar 04, 2022

ATL Reflects on Pilot Freight, Logistics M&A

Kirby Fine, managing partner of ATL Partners, which sold portfolio company Pilot Freight to Mearsk for $1.8 billion, said consolidation will continue in the global shipping business.

The Deal
By Lisa Botter

Consolidation in logistics around the world is expected to gather pace as supply chain issues persist.

Analysis from Deloitte shows that logistics deals including a European target recovered swiftly in 2021, after a dip due to the pandemic. And 2022 is also looking strong.

A PwC report found that deal values increased by 84% in the year to Nov. 15 in the transportation and logistics sector and deal volume increased by 11%, driven primarily by deals in the logistics, vehicle rental/leasing and trucking sectors.

Supply chain dependency and disruption have driven investors to the dealmaking table as they seek to navigate changes, PwC said.

Supply chain management has been a key focus for international retailers and their logistics partners in recent months as bottlenecks caused by pandemic-related labor issues, port congestion and container shortages hinder trade around the globe.

The fragmented logistics sector has witnessed a flurry of dealmaking in recent months, many with cross-border implications. Private equity backed companies with scale such as Pilot Freight Services LLC, which was recently acquired by A.P. Moller-Maersk A/S for $1.68 billion, are gaining the eye of international strategics while smaller outfits are being rolled up in everything from logistics technology to micro-hubs.

ATL Partners, an aerospace, transportation and logistics-focused private equity fund and backer of Pilot, has had a front row seat to the industry's consolidation.

“[Pilot] is a good example where we started with a thesis around e-commerce and said, ‘Okay, do we want to compete with UPS and FedEx on the parcel side?’ No, we saw the heavy bulky side of e-commerce as relatively under penetrated but growing quickly," said Kirby Fine, a partner at ATL Partners, which had backed Pilot since 2016 along with British Columbia Investment Management Corp.

The firm also foresaw how "supply chain landscape would have to change to meet e-commerce demand for these types of shipments,” Fine said, adding that there was a lack of capacity to meet the demand.

Pilot was one of three logistics investments currently in ATL's portfolio. The others are Arrive Logistics, an “extremely high growth” tech-enabled freight brokerage business, and Global Critical Logistics, which does freight forwarding for music touring, fine art, film & TV and sports events.

“Our investment process involves a rigorous, research driven approach. We break our sectors down into 70 subsectors and spend multiple years developing a thesis around a particular subsector theme,” Fine said. “At any one time, we’re pursuing approximately five to 10 themes that we think are the most attractive. We then identify the best positioned companies in a particular subsector and seek to partner with the management team or founder, and bring our resources and network, to execute on our thesis.”

Fine said Pilot was the initial building block in executing that strategy.

From the Ground Up

In the early days of ATL's investment, Pilot first acquired franchisees, giving the company more operational control to improve service levels across the network. In 2016, Pilot had 75 stations and hubs under its control, at the time of the Maersk deal the company had 87 in the U.S. alone.

It then looked to add last-mile services, which included the acquisition of Manna Freight Systems in July 2018 and DSI Logistics in March 2021. The DSI acquisition positioned Pilot as the second-largest last-mile delivery provider for big and bulky goods in the U.S.

The third piece of the investment strategy was a network to control its own middle mile capacity. “An asset-light expedited LTL network that we controlled that enhanced our competitive moat,” Fine said, adding that Maersk found that “particularly attractive.”

The company had been building out its own linehaul network with two hubs and plans for four additional hub locations based on analysis of its network volumes. Pilot saw that American Linehaul Corp.’s hubs overlapped exactly with Pilot’s plans and acquired American Linehaul in August. “That was just a perfect acquisition that accelerated us by roughly three years in terms of being able to build out our own network and also brought the capacity we needed immediately,” Fine said.

The last piece of the strategy was technology. During ATL’s hold period Pilot invested over $70 million in technology and data science to enhance and automate decision making and improve productivity.

“Pilot is a good case study around how we typically invest. It takes multiple years up front to develop a thesis and identify a company and management team, and then a lot of work during the hold period to execute on our vision to build a market leader,” Fine said.

Healthy Appetites

Fine said New York-based ATL had been approached by strategics and sponsors throughout its entire hold period of Pilot, and increasingly in recent years. So it was good timing to run a sales process with strategics and sponsor buyers, he said. The process was run by Harris William & Co. and Morgan Stanley.

Fine said that while its other logistics portfolio companies are of interest to buyers they “don’t have active plans to exit,” as they are in different phase of their value creation plans for each of them.

In the near term, they see “significant opportunity” to continue their value creation plans with Arrive and Global Critical Logistics.

Fine said that he expects more consolidation in the market. “I think you'll see more players continue to try to buy inland capacity.”

He said he doesn’t see the supply chain issues gripping the world resolving anytime soon. “People often focus on ocean freight issues and port congestion, but if you look at what is driving these issues, there are challenges at each leg of the supply chain that have cascading effects. There's a lack of equipment, there's a lack of trucks,” Fine said, adding that on top of that a global driver shortage, a lack of chassis and a lack of warehouse staff.

“None of these issues are going to be resolved in the near term. So we're prepared for this inflationary environment on the transportation side to continue,” he said.

So, what does this environment mean for ATL? “We expect these structural capacity and labor shortages to persist, particularly as supply chains adjust to the increasing service, technology, and visibility requirements of e-commerce. Accordingly, we are pursuing investment themes in areas that address these pain points, including through network-based business models, warehouse automation, and supply chain technology, where we believe we can leverage our deep sector experience and proven approach to building market leaders,” Fine said.

“We do think it sets up an attractive environment for those secular trends, I'd say [increasingly] you have to pick the right spots to play,” he said.