Monday, January 12, 2009

History Does Not Favor Greatwide

The outlook for Greatwide Logistics does not look good. It pains me to say that because I know several very talented managers who work there. Yes, I know Greatwide has over 5,000 owner operators. And I know it generates a billion plus in revenue. And I also know that Greatwide last ranked 23rd on the Transport Topics list of top 100 carriers. Still as truckload carriers go Greatwide is no J B Hunt or Schneider. Those companies became behemoths through incremental growth achieved over much time. In contrast, Greatwide Logistics rose onto the trucking scene like a pre-fabricated phoenix. The company is actually an amalgamation of several trucking companies glued together with debt and re-packaged under a new name. There’s nothing incremental about it.

The lure of creating the next J B Hunt or Schneider National in a fraction of the time must have a very strong appeal. We see deals like Greatwide Logistics come along every couple of years. The investors in these companies generally do not drive trucks or run trucking companies. They come from the financial community - a savvy lot - but apparently less so when it comes to grasping the economics of trucking. The theory behind Greatwide goes something like this: buy a bunch of companies on debt, consolidate their revenues, and let everything else fall magically into place. After all, consolidation also means cost savings, extra cash and the ability to service debt. No doubt, the Power Point presentation made it all look very logical – particularly the mouth watering last slide highlighting the IPO. Unfortunately, there is nothing logical about the economics of the trucking business.

In trucking no amount of revenue guarantees a profit – especially if a company holds a lot of debt. Think back to AmeriTruck, Trism and Transit Group to cite just a few of the forerunners to Greatwide. We’ve seen this movie before. It never ends pleasantly. Consolidation in other industries might yield cost savings, but trucking has never enjoyed noteworthy economies of scale. Sure, a company like Greatwide might save a few bucks by combining functions such as personnel, marketing and risk management across its subsidiaries. Still the two biggest costs for every trucking company are fuel and driver wages. (In Greatwide’s case payments to owner operators essentially encompass these items.) These costs do not decline with size. Diesel costs X amount per gallon whether you fill-up one truck or a thousand. The same goes for driver wages. In fact trucking arguably suffers from diseconomies of scale. Does a large trucking company with an elaborate home office, huge corporate staff and multi-state terminal network enjoy a cost advantage over the guy who eats and sleeps in his truck? Likely not, unless it has a very talented management team, which of course is always the first thing cut in deals like Greatwide.

Greatwide Logistics is less a trucking company than a financial transaction. The investors behind this deal never set out to haul freight. They set out to get rich. But no one gets rich in the trucking business without paying major dues. Now in the midst of arguably the worse freight hauling environment in thirty years, the debt that fueled Greatwide’s meteoric rise has turned into a life threatening avalanche. The margins in the trucking business have never accommodated excessive debt service. History shows that almost every highly leveraged deal in trucking has failed.

Sadly for the employees, suppliers and other stakeholders, all the perfunctory efforts in bankruptcy to trade out Greatwide’s debt for equity will surely prove too little too late.

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