Hub can now play with dedicated's big boys through Estenson buy

Hub Group Inc.'s $306 million acquisition of domestic contract carriage provider Estenson Logistics will elevate Oak Brook, Ill.-based Hub near the top ranks of the nation's dedicated carriers and be a major step towards rounding out Hub's product portfolio, analysts said.

The acquisition of Mesa, Ariz.-based Estenson by Hub's trucking unit will add 1,200 power units to Hub's fleet, bringing its total dedicated and nondedicated fleet to about 3,800 power units. Hub currently does not provide dedicated contract carriage services.

The Estenson deal, expected to close on or before July 1, will move Hub into the top 15 of U.S. dedicated contract carriers, according to Transport Topics, a trucking publication. J.B. Hunt Transport Services Inc. is the largest provider of dedicated services by tractor count with more than 7,400 tractors, according to Armstrong data.

All told, Hub will have 3,800 tractors in its fleet.

A $3.6 billion a year company, Hub is a very large player in the $61.8 billion a year market for domestic transportation management services. It is especially strong in the food and grocery and consumer products segments. Perhaps unsurprisingly, about 72 percent of Estenson's revenues come from retail and consumer products. Hub executives said late last week when the deal was disclosed that the company expects $100 million in cross selling revenue over the next five years.

Estenson, a highly regarded carrier, generates about $250 million in annual revenue. Under a dedicated contract carriage model, a trucker dedicates equipment and drivers to serving an individual shipper, allowing that customer to lock in rates and capacity with the carrier for a multi-year period. The standard dedicated contract runs three to five years, and usually requires the customer to compensate the provider for an agreed-upon number of miles driven on a round-trip basis.

Companies with enough freight to justify round trips—often from DCs to stores and back—may find dedicated a better value proposition than paying for one-way truckload service.

The 2016 net revenue for dedicated services grew to $14.2 billion, up 2.6 percent. The dedicated market saw its strongest growth in the late 1980s and early 1990s but it has since trailed off. From 1995 to 2016, dedicated services grew by 6.9 percent compounded annually, Armstrong said. That was well below the double-digit growth rates of domestic transport management, international transport management, and value-added warehousing and distribution, the three other segments that Armstrong said make up the $166.8 billion a year U.S. third-party logistics (3PL) industry.

In a note today, John G. Larkin, analyst for investment firm Stifel, said the acquisition addresses Hub's goal of "offering a broader range of services to its existing customers." The deal makes Hub a "more attractive company," Larkin wrote. The analyst raised his earnings per share estimates for 2017, 2018, and 2019 based in part on the merits of the proposed deal.

Founder Tim Estenson will head Hub's dedicated contract group, which will be based in Mesa, Ariz.