Knight Transportation proposes to buy USA Truck for $242 million in cash, debt assumption

Truckload carrier Knight Transportation Inc. disclosed today that it has proposed to acquire USA Truck Inc., another truckload carrier, for $9 a share in cash. Knight would also assume USA Truck's $147 million in debt, valuing the total deal at $242 million.

Phoenix-based Knight disclosed in a Securities and Exchange Commission filing that it already owns nearly 830,000 shares of Van Buren, Ark.-based USA Truck stock, equal to 8 percent of its outstanding shares.

"We are confident that USA Truck shareholders will share our strong belief that Knight's $9-per-share, all-cash, premium proposal would provide significant and immediate cash value that is significantly more attractive than USA Truck's standalone prospects," Kevin Knight, Knight's chairman and CEO, said in a statement. Knight and USA Truck operate complementary service lines with similar lengths of haul and fleets of roughly the same age, Knight said in the statement.

In an Aug. 28 letter to USA Truck's board in which he disclosed Knight's intentions, Knight said his company has tried, without success, to convince USA Truck's board of the combination's value. In the letter, Knight said the proposed purchase price represented a significant increase over the $5.63-a-share level where USA Truck was trading the day before. Knight said in the letter that his board would be willing to modestly increase its offering value if Knight's due diligence efforts uncover more value at USA Truck than has already been identified.

As of 2: 30 pm EDT today, USA Truck shares were trading at $8.76 a share, up $2.30 a share on the trading day. Knight shares rose 64 cents a share to $16.64 a share.

Knight said the acquisition would "reverse the erosion of value" at USA Truck stemming from eight consecutive quarters of net losses that have totaled $30 million. Knight's consolidated operating ratio, which is the ratio of operating revenues to expenses, was 85.3 percent in the six months ending June 30; that means Knight spent 85 cents for every $1 in revenue. USA Truck's operating ratio, by contrast was 101.7 percent, meaning it spent $1.07 for every $1 in revenue.

USA Truck did not have any comment at press time. The company is in the midst of a multiyear turnaround effort led by President and CEO John Simone, former head of the dedicated contract carrier Greatwide Logistics. In the quarter ending June 30, USA Truck reported a net loss of $1.04 million and an operating loss of $371,000 on revenue of $137.9 million. Revenue was $9 million higher than in the year-earlier quarter, while the net and operating losses had narrowed year-over-year.

START OF TRUCKLOAD CONSOLIDATION?
USA Truck operates 2,100 tractors. If the deal goes through, it would represent the largest fleet acquisition since Con-way Inc. purchased Contract Freighters Inc. in 2007, according to Benjamin Hartford, transport analyst at R.W. Baird & Co., a Milwaukee-based investment firm, in a research note today.

A Knight purchase of USA Truck could signal the start of a consolidation trend, according to Hartford. Currently the truckload industry is extremely fragmented, and all truckload carriers are facing erratic volume growth and increasing pressures from higher labor, equipment, and regulatory costs. A consolidation trend could rationalize capacity and lead to firmer pricing, especially if demand improves, Hartford said.