3PLs catch Wall Street's eye

Owners of third-party logistics service companies (3PLs) may want to keep the phone lines open. The next caller could well be an investor anxious to shower them with cash. With its track record of double-digit growth and strong revenue projections, the 3PL industry is catching Wall Street's attention.

In late June, Ozburn-Hessey Logistics (OHL) announced that New York-based private equity firm Welch, Carson, Anderson & Stowe had purchased a majority stake in the company. The purchase price was not disclosed, but sources familiar with the deal say OHL probably fetched far more than the typical buyout rate, which is five to seven times the acquired company's EBITDA (earnings before interest, taxes, depreciation and amortization).

And that's hardly an isolated case. Earlier this year Jacobson Companies, which is controlled by investment firm Norwest Equity Partners, bought up Bekins Logistics. Erik Torgerson, a partner at Norwest and Jacobson board member, says he expects acquisition activity in the third-party logistics industry to continue to gather steam.

Cash and carry The companies gobbling up stakes in 3PLs are more likely to be private investors than strategic buyers like competing 3PLs. With billions of dollars in their buyout funds, a host of private equity buyout firms are looking to put that uninvested capital to work. Those firms include giant investment house Warburg Pincus, Reliant Equity Investors, TA Associates,Greenbriar Equity Group and New York-based Fenway Partners. Fenway has already demonstrated an interest in the logistics market. In June, the company acquired Panther II Transportation Inc., one of the largest providers of expedited ground transportation services in North America. Fenway already owns Total Distribution, a warehousing and logistics company with a strong presence in the western United States, and is believed to have been a bidder for OHL.

As for what's sparked this interest in a relatively obscure market sector, it's all about the money. "There are not a lot of growth sectors in this economy right now that are experiencing double-digit growth, and clearly contract [logistics] and various other segments within the whole supply chain industry are looking at some pretty substantial growth," says Scott McWilliams, chief executive officer of Ozburn-Hessey Logistics. "That's what has driven the [private equity firms'] attraction to the industry."

Like Norwest's Torgerson, Ben Gordon, managing director at BG Strategic Advisors, expects a surge in 3PL acquisitions over the next three to five years. "There is a tremendous level of interest from private equity firms and other logistics companies who are excited about paying top dollar for great logistics businesses," says Gordon, whose firm functions as an investment banker and strategic advisor in the logistics sector. "Valuations are continuing to maintain good strength, and the number of parties interested in OHL reflects the strong position of the company and the industry in general."

The third-party services business isn't the only sector of the supply chain market piquing investors' interest these days. The technology segment has attracted attention as well. This spring, for example, Francisco Partners acquired software company RedPrairie Corp. from Advent International Corp. and Vestar Capital Partners. Typically, private equity firms hold their investments for three to five years before cashing them in, usually by selling the company or taking it public.