Third party logistics (3PL) giant C.H. Robinson Worldwide Inc. took a giant leap into the less-than-truckload (LTL) segment late yesterday when it announced the purchase of Freightquote.com, a broker that generates most of its business from smaller LTL shippers, for $365 million in cash.
Under the transaction, Freightquote will maintain its headquarters in Kansas City, Mo., and Eden Prairie, Minn.-based Robinson said it plans to significantly expand its operations there. Freightquote will keep its name and operate independent of Robinson. Tim Barton, Freightquote's founder and executive chairman, will stay on as a consultant to Freightquote, Robinson said in a statement.
Founded in 1998, privately held Freightquote has built its business around an e-commerce platform that allows small to mid-size shippers to access multiple rate offerings, to receive automated load acceptance confirmations, and to process payments. It has about 80,000 North American customers, most of whom use the company for transactional services rather than for building longer-term strategic relationships. Its calendar year 2014 gross revenues are projected to reach $623 million, while its net revenues—revenues after subtracting the cost of purchased transportation services—are expected to hit $124 million.
LTL accounts for about two-thirds of Freightquote's net revenue base, with truckload comprising virtually all of the balance. Robinson and Freightquote are nonasset-based providers, meaning they control no transportation assets and rely on providers with equipment to move their customers' shipments. Both companies share some of the same LTL carrier base.
John Wiehoff, Robinson's chairman and CEO, told analysts today that the transaction expands Robinson's reach into small businesses, a market he called "enormous."
Robinson, by contrast, has a stable of large national accounts that it manages through strategic relationships.
Robinson would prefer to grow organically and will only look at prospective acquisitions that offer a unique value proposition, Wiehoff said. Freightquote presented Robinson with one of those opportunities, he said.
The bidding for Freightquote came down to Robinson and Greenwich, Conn.-based XPO Logistics Inc. XPO is a fast-growing broker, expedited transport provider, and freight forwarder that is emerging as Robinson's chief rival. Robinson acted in part as a defensive measure to keep Freightquote out of the hands of XPO, which has been growing largely through acquisitions. Wiehoff said on the analyst call that he was unaware of other bidders for Freightquote. Bradley S. Jacobs, XPO's chairman, president, and CEO, declined comment.
The Freightquote acquisition will dramatically boost Robinson's LTL net revenue, which stood at $195.5 million through the end of the third quarter. It will also add volume, scale, and density to Robinson's LTL pipeline, ostensibly enabling it to exercise pricing leverage over LTL carriers.
In the third quarter, truckload services accounted for roughly 60 percent of Robinson's total transportation net revenues through September. LTL, by contrast, represented about 14 percent of its total net revenue through the first nine months. Robinson is the nation's largest freight broker, and its total nine-month gross revenue of $10.1 billion, most of which comes from brokerage, dwarfs that of any rival.
Like other third-party logistics firms with brokerage operations, Robinson's roots lie in the truckload sector, which is 10 to 14 times larger than the $35 billion-a-year LTL category. However, brokers have begun to expand more deeply into the LTL segment, where they've always had some degree of exposure. Today, third-party logistics firms control about one-fourth of the LTL market, up from 2 percent in 1998, according to data from consultancy SJ Consulting.
The increasing encroachment of 3PLs and brokers into the market has meaningful implications for LTL shippers and carriers. These intermediaries bring with them large freight volumes that they could leverage to extract lower carrier rates, thus negatively impacting carrier margins, according to Satish Jindel, SJ's founder and president. Jindel said the firm is preparing a study examining the trend. The study will be published sometime in mid-January, about the time the Robinson-Freightquote transaction is expected to close. Jindel said in a phone interview that LTL carriers will need to be vigilant to protect their profit margins from high-volume 3PLs seeking to use their clout to drive down prices.
In moving into LTL, brokers see an opportunity to penetrate a less-mature sector for their services. In addition, they want to diversify away from truckload, as big asset-based truckload carriers like J.B. Hunt Transport Services Inc., Schneider National Inc., and Werner Enterprises Inc. form their own broker units to compete with the traditional players.
There are differences in the two segments. The truckload market is very fragmented, while in LTL the top 10 carriers control the bulk of the shipments. While a truckload shipment involves a relatively simple line-haul from points A to B, LTL transactions typically involve complex pricing scenarios and carrier rules. They also typically involve multiple stops and cross-docking events, which can result in longer transit times, delivery variability, and additional handling, which increases the chances of freight damage.
Robinson's last big acquisition took place in September 2012 when it bought Phoenix International Inc., an international freight forwarder and customs broker, for $635 million in cash and stock. The transaction expanded Robinson's presence in the global trade and transport arena. Through the first nine months, international services generated about $242 million in net transport revenue, about 15 percent of the company's overall transport net revenue for the period.