Knight looks ready to go hostile on acquisition of USA Truck

Knight Transportation Inc.'s proposed $242 million acquisition of USA Truck Inc. looks like it could become hostile.

In the wake of USA Truck's rejection of Knight's formal proposal late last week, Phoenix-based Knight issued a statement today saying it is "prepared to take the necessary steps" to consummate a deal. Knight said several of USA Truck's largest shareholders support the buyout and have encouraged Knight to pursue it.

Knight's remarks aren't surprising, as it was long believed that, if a friendly offer failed, it would go directly to USA Truck's shareholders to pressure the board to do a deal.

The battle between the two truckload carriers escalated on Thursday after USA Truck issued a statement rebuffing Knight's offer and criticized Knight for presenting its proposal "in a misleading manner." Van Buren, Ark.-based USA Truck said its board reviewed Knight's unsolicited proposal in early September and determined it "substantially undervalued" USA Truck in light of changes made by top management as part of its ongoing multiyear turnaround plan.

USA Truck said in its statement that Knight on Sept. 13 rejected its offer to meet and discuss the proposal, informing USA Truck that it saw no need to discuss the matter at that time.

Under the proposal, Knight, which already owns 8 percent of USA Truck stock, would pay $9 in cash, or about $95 million, for the remaining shares. It would also assume $147 million in USA Truck debt.

Knight said an acquisition would shore up USA Truck's money-losing operation and provide shareholders with better value than if the company continued to operate on its own. Knight and USA Truck operate complementary service lines with similar lengths of haul and with fleets roughly the same age, Knight has said.

If the deal goes through, it would represent the largest truckload fleet acquisition in six years. USA Truck operates 2,100 rigs, while Knight operates about 4,100 tractors.

The U.S. truckload market, estimated at between $400 to $500 billion a year, is extremely fragmented. Swift Transportation Inc., the largest carrier by truckload revenue, controls only 2.4 percent of market share, according to data from the investment firm Robert W. Baird data on 14 large truckload carriers. (Knight is part of that list, USA Truck is not.) The second-largest, Schneider National Inc., controls about 1.8 percent of the market, according to Baird. Schneider pulls in significant additional revenue from other sources such as logistics and intermodal.

The back-and-forth between Knight and USA Truck is being watched as a possible signal of the start of a consolidation trend in the truckload market. With all carriers facing uneven volume growth and increasing pressures from higher labor, equipment, fuel, and regulatory costs, some of the weaker carriers may become takeover targets or go out of business. This, in turn, could shrink capacity and firm up pricing.