Forward Air’s stock has dropped a lot since the company announced last month that it was buying Omni Logistics, but two reports from debt rating agencies are much more positive about the deal’s future.
Forward Air is taking on a large amount of debt to pay for the purchase. Two of the three big rating agencies, S&P Global grades (NYSE: SPGI) and Fitch Ratings, have given grades to that debt. Before now, Forward didn’t have any debt that was graded or sold on the open market.
Both of the rating agencies gave the debt of Forward Air (NASDAQ: FWRD) a BB-. That doesn’t quite meet the standards for investment grade, but it’s only three steps below.
LTL carrier XPO (NYSE: XPO) has a BB+ rating from S&P Global, even though the company gave a BBB- rating to one of XPO’s financial instruments in May. For financial reasons, you need at least a BBB- grade from S&P.
Forward Air’s Strategic Acquisition of Omni
When the deal was made on August 10, the business was worth $3.2 billion. Forward owned 37.7 percent of Omni, which was worth $150 million in cash to Omni’s investors. Since 2005, the company has grown from having 300 employees and 300 customers to having 4,500 employees and 7,000 customers.
Forward Air took on $1.85 billion in debt in order to pay for the purchase of Omni. This includes a $400 million rolling line of credit that is not rated and is due in 2028. This amount is made up of preferred shares worth $1.16 billion and a first-lien term loan for $925 million that is due in 2030. S&P says that preferred stock is being looked at like debt. People expect that the Forward Preferred Stock will at some point in the future be changed into Common Stock.
CEO Tom Schmitt’s Perspective on Forward Air’s Stock Price Post-Omni Acquisition
In a message sent to FreightWaves, CEO Tom Schmitt said he didn’t want to talk about how the credit rating agency saw the company’s debt.
He stated that the recent rating release from S&P is a further progression in the financing process for our merger with Omni. We are excited about the upcoming addition of Omni to the Forward family. This will enable us to provide exceptional service to our domestic forwarder customers and also compete for high value LTL business from shippers who do not work with forwarders.
A part of the S&P report could be seen as a scolding of the investors who drove the price of Forward’s stock down from around $111 before the deal was announced on August 10 to its present level of around $63. Even though ratings agencies aren’t meant to care about a company’s stock price, and if they’re rating a privately owned company, there isn’t a stock price anyway.
Enhancing End-Market Diversification
S&P wrote that they expect Forward Air’s end-market diversification and scope to improve through the acquisition. Omni’s freight-forwarding segments will complement Forward Air’s existing domestic operations and diversify this segment beyond North America, specifically the U.S. In our view, the addition of Omni’s warehousing and distribution operations will also improve diversification.
Balancing Competition and Collaboration
Investors are worried about the Omni deal because it could be a threat to freight forwarders that Forward used to help by offering linehaul services but is now competing directly with.
Schmitt stated at the Jefferies Industrials Conference that the company must acquire “earned trust” from its forwarding customers. Schmitt said that as long as we ensure that the separate sales force continues to provide the best service, gives them every opportunity to retain and acquire business, and secures the best rates for them, all we need to do is win together.
The S&P report on Forward did not reflect any of those fears. The ratings agency wrote that Forward Air’s asset-light model, combined with their ownership of approximately 6,000 trailers and 270 tractors and straight trucks, along with Omni’s asset-light model, will enable Forward to maintain profitability and financial flexibility during economic downturns, in comparison to their peers who have more assets.
Fitch’s Analysis of Risks and Opportunities in Forward Air’s Acquisition of Omni
Fitch discussed the risks of combining the two companies in a somewhat more aggressive manner. The company wrote that Fitch views the execution risk of adding a large new service line, freight forwarding, as elevated. This is especially true in the near term when it is experiencing heightened cyclicality due to exposure to challenged air and ocean freight conditions.
Fitch described Forward’s business as differentiated from common LTL operators by focusing on expedited or high value freight, where premium quality service levels are able to capture outsized margins. Forward will gain “direct retail access, which estimates open up half of the $15 billion expedited LTL market” by combining with Omni.
Fitch’s Perspective on Forward Air’s Acquisition of Omni
Fitch stated that, at this point, the deal is perceived as neutral-to-positive for Forward’s business profile. The statement mentions that the deal includes a higher risk of executing a new service line, freight forwarding. This is especially true in the near term due to the increased cyclicality caused by challenging air and ocean freight conditions.
Fitch estimates that there will be cost savings of approximately $70 million in EBITDA within the first three years after the deal. These savings primarily result from Omni’s ability to utilize Forward’s LTL network. Fitch estimated that the “revenue synergies” referred to by Fitch are expected to generate $30 million in EBITDA by leveraging “cross-selling opportunities.”
Contact Lading Logistics for comprehensive logistics solutions.
Overall, Forward Air has taken on a significant amount of debt to complete the deal. Lading Logistics is dedicated to staying up-to-date with the latest developments in the trucking industry. They offer a wide range of services, including:
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