Swift, Knight $6 billion merger gives Kevin Knight the keys to a kingdom

In one fell swoop, Kevin P. Knight has become king of the truckload industry hill.

Knight's company, Phoenix-based Knight Transportation Inc., made history today by merging with hometown rival Swift Transportation Co. in a $6 billion all-stock deal that creates the nation's biggest truckload company. The transaction is the largest trucking deal ever, doubling Greenwich, Conn.-based XPO Logistics Inc.'s $3 billion purchase of trucking and logistics firm Con-way Inc. in 2015. The Knight-Swift deal, which has been approved by both boards, is still subject to shareholders' approvals. Knight said in a statement that certain unidentified shareholders have already voiced support for the deal. It is expected to close sometime in the third quarter.

The companies will conduct their daily operations independently and will maintain separate brands, moves designed to avoid the difficult process of integrating and re-branding two such large firms. However, economies of scale at the corporate level should generate pre-tax savings of $15 million in the second half of the year, and a combined $250 million in 2018 and 2019, Knight Transportation said in a statement.

Kevin Knight, 60, who was Knight's CEO from 1993 to 2014 and has been its executive chairman since January 2015, will become executive chairman of Knight-Swift Transportation Holdings Inc., as the company will be known. Knight will also become president of the Swift operating entities. David Jackson, Knight's CEO, will assume the same role with the new entity, while Knight CFO Adam Miller will become the new company's CFO. The new board will be comprised of all current Knight directors and four current Swift directors.

From an accounting standpoint, Knight will be considered the acquiring carrier. Swift shareholders will own 54 percent of the shares in the new entity.

The odd man out is Richard Stocking, the highly regarded Swift president and CEO, who will leave the company after the deal closes. At 46, Stocking was part of the next generation of trucking CEOs that is ready take over from their aging founders. Last September, Stocking became co-CEO along with Swift Founder Jerry Moyes. However, Stocking immediately assumed all day-to-day responsibilities, effectively forcing Moyes out, according to John G. Larkin, transport analyst for Stifel, an investment firm. This didn't sit well with Moyes, Larkin said.

Stocking's departure resulted from a lost power struggle with Moyes, who still wields enormous influence, Larkin said. "People often underestimate (Moyes') business savvy and his access to top-notch advisors. Plus, he values loyalty highly," according to Larkin. If Moyes felt betrayed by Stocking, "the game was over," he said.

Moyes, 72, will serve as a non-employee senior advisor to Kevin Knight and Gary Knight, Kevin's cousin and one of four Knight family members who founded the company in 1990. Moyes' continued involvement with the new entity reflects the companies' long, interlocking history. Randy Knight, another cousin of Kevin Knight, helped three members of the Moyes family, including Jerry, grow Swift's business to about $25 million by the mid-1980s before going on to co-found Knight Transportation. Kevin Knight worked for Swift between 1975 and 1984, and again from 1986 to 1990. During those intervals, he was executive vice president and president of Cooper Motor Lines Inc., a Swift subsidiary.

Jerry Moyes took his namesake company private in 2007, and then took it public in 2010.

The Knight-Swift deal creates a $5.1 billion transportation and logistics giant with footprints in dry van and refrigerated transport, dedicated contract carriage, cross-border Mexico and Canada operations, truck brokerage, and intermodal. The fleet will consist of approximately 23,000 tractors and 77,000 trailers. The combined company will have about 28,000 employees. Swift, with about 18,000 tractors, is the nation's largest trucking company based on fleet size.

Benjamin J. Hartford, transport analyst for Robert W. Baird & Co. Inc., an investment firm, said he was bullish on the deal because it combines Swift's scale in truckload and intermodal with Knight's history of strong operating performance and return on invested capital. For 2016, Knight reported an operating ratio—a measure of revenue versus expenses—of 85.3, up from 82.6 in 2015. Knight blamed the higher 2016 ratio on increased net fuel expense, lower gains on equipment sales, and rising driver-related costs.

The truckload industry will spend much time in the near term figuring out the deal's ramifications, according to Eric Fuller, CEO of US Xpress Enterprises Inc., a large, privately held truckload carrier based in Chattanooga, Tenn. Speaking at the NASSTRAC annual shippers conference in Orlando today, Fuller said the deal, in and of itself, may not reshape the industry landscape. "Whether you operate 7,000 trucks or 20,000 trucks, it's probably not going to make much of a difference," he said.

The bigger question, according to Fuller, is whether the merger whets the public markets' appetite for more consolidation among big truckload carriers in a $600 billion segment that remains highly fragmented. On Friday, Schneider National Inc., the nation's largest, privately held trucking company and a huge player in the truckload space, began trading publicly, raising about $550 million in its initial public offering, and valuing the company at about $3.3 billion.

"We will see more consolidation because it is in the economic self-interest of every truckload carrier to gain the benefits of scale," Benjamin Gordon, who heads BG Strategic Advisors LLC, a Palm Beach, Fla., transport and logistics mergers-and-acquisitions firm said in an e-mail.

Fuller lauded Knight and Swift for deciding to operate independently. "It is tough to marry companies in this industry, especially two companies that are this big," he said. "I know that we would run separate if we were in the market for an acquisition."