Wednesday, March 11, 2009

Second Thoughts on Greatwide Logistics

A few weeks back I posted an entry about Greatwide Logistics that painted a less than rosy picture. So when I received an e-mail from Dick Metzler, Greatwide's Chief Commercial Officer, asking me to call him, I half expected I might receive an earful. As it turned out, we had a very pleasant conversation. Dick did not dispute my larger point about the hazard debt poses to trucking companies. He merely wanted to share a bit more context into Greatwide’s ownership history and more importantly its recent emergence from a short stint in bankruptcy.

To paraphrase Dick (more accurately in spirit than in detail); Greatwide’s roots go back to a large refrigerated carrier called Transport Industries. Earlier in the decade the family that controlled Transport Industries sold out to a private equity firm called Fenway Partners. Fenway subsequently added several other trucking acquisitions to the mix, re-branded the whole thing as Greatwide, and installed a management team consisting of Dick, CEO Ray Greer and others to run the place. The deal could not have gone better: so well in fact that by 2006 Fenway decided to cash out for a huge profit. Accordingly a new group of private equity owners took over intent on making an even bigger killing by doubling down on the leverage. Unfortunately for the new owners conditions in trucking started to deteriorate around this same time. Ultimately the combination of less freight plus more debt proved too much.

Normally a non-asset based firm like Greatwide would enjoy a huge advantage over its asset based competitors in a declining freight environment. The beauty of an owner operator fleet is that capacity and overhead tend to adjust instinctively to declines in freight volume. Landstar Systems, the darling of the non-asset based sector, has thus far navigated the present economic climate quite fruitfully. Interestingly enough, Greatwide operates with a similar model. However, if a non-asset based company like Greawide carries massive debt it loses all advantage. Debt to a non-asset based carrier represents the asset based equivalent of parking trucks against a fence. It’s pure financial drain.

Based on my observations of other debt laced trucking deals, I saw little escape for Greatwide. Dick, however, relayed something that previously had not occurred to me. When it comes to negotiating with debt holders, non-asset based companies have a distinct advantage. Essentially it comes down to this: there’s nothing to liquidate. Thus the normally trying task of inducing bondholders to swap out secured debt for unsecured equity becomes more of an exercise in making an offer you can’t refuse. According to Dick this state of affairs made for a speedy and relatively painless time in bankruptcy. The company has now emerged from Chapter 11 with its debt load reduced by more than 75%. Meanwhile all of the company’s vendors, owner operators and employees have come out completely whole.

As Dick shared these details another thought occurred to me. This man knows the trucking industry. He has a very impressive resume encompassing important career stops at DHL, Fed-Ex and American President Lines (APL) where he last served as CEO. Greatwide’s CEO Ray Greer has an equally impressive record. In other words, these guys are all about running trucking companies. How frustrating it must feel then when they end up working for owners who don’t truly understand the business.

With the meltdown on Wall Street, we’ve heard a lot about “the disconnect” between the professional management class and the shareholder class. Our blood boils when we learn about the salaries and bonuses paid to managers who run companies into the ground. Clearly, however, as Greatwide shows the knife can cut both ways. In this day and age of private equity deals great management teams can end up under the control of scalawag owners. On a larger scale, what chance does any company have when the interests of management and ownership fail to align?

Greatwide's debt for equity swap not only gives it a new lease on life, but also a new start with a fresh set of owners. Dick seems genuinely pleased with this development. Having gained a sense about this man's determination to succeed, I can only conclude that Greatwide's future looks markedly brighter today than it did just a few months ago.

Thanks for checking in…

Ed, III


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