USX - Knight-Swift Acquires U.S. Xpress: Small Deal Great Return But Scary Downside

2023-04-13 12:42:54 ET

Summary

• Knight-Swift Transportation Holdings Inc. is buying U.S. Xpress Enterprises, Inc., with the deal expected to close in late 2Q or early 3Q.
• U.S. Xpress shareholders get $6.15 per share.
• Deal has low risk of failure, as both parties seem to benefit.
• I don't expect regulatory intervention because of the industry, small deal size, and the target benefits from stability.
• Potential downside risk if the deal were to break is large.

Trucking giant Knight-Swift Transportation Holdings Inc. ( KNX ) is acquiring the tiny trucking firm U.S. Xpress Enterprises, Inc. ( USX ). The transaction is expected to close late in the second quarter or early in the third quarter. Chattanooga-based U.S. Xpress is being taken out for a small sum, but actually generated about $2.2b in 2022 operating revenue with a fleet of 7,200 tractors and 14,400 trailers. The firm was in a tough spot because it has a fairly high debt load. The company's equity tripled on the deal announcement, but as the table with Seeking Alpha data (below) illustrates, even now its debt-to-equity ratio is very high vs. peers:

Post-acquisition, the combined company's revenue run rate is expected to approach $10b while operating 25,000 tractors and 93,000 trailers. The deal has been approved by both companies' boards and is anticipated to be accretive to Knight-Swift's adjusted EPS in 2024.

U.S. Xpress shareholders get $6.15 per share in cash. The Fullers family will roll their shares into a 10% interest in a new Knight-Swift subsidiary. The acquisition will be funded out of Knight-Swift's $1.3b unrestricted cash and available liquidity.

The big risk is that the deal breaks, as it could send U.S. Express into bankruptcy or at least back to a share price below $2. Meanwhile, the upside from $5.95 to $6.15 appears limited. At the end of the day, it is still 3.36%, and a small deal like this should be able to get wrapped up quickly. I don't expect any regulatory pushback because trucking is notoriously fragmented.

There are a few reasons why I think the deal is a bit less likely to fail than is usually the case. I don't think the acquired party is likely to want to get out because it would be quite vulnerable given its balance sheet . The acquirer appears to be getting a pretty good price, and analysts seem to like the deal (which is not that common). There is a break fee, but it is quite modest, especially in light of the enterprise value.

Because this is such a small deal, I could see it close in 2 months, and that would put the annualized return at over 20%. If it closes in 3 months, the annualized return is more like 14%. I'd be disappointed if it took 4 months to close, but the annualized return would still amount to just over 10%. That may sound amazing, and I do think these are the most likely scenarios. However, keep in mind that if it were to break for some strange reason you are suddenly looking at a stock that's down 70%, and it could even end up in bankruptcy if it breaks in an awkward economic moment (and that's usually when deals break).

The scary downside risk and U.S. Xpress Enterprises, Inc.'s small market cap (almost distressed nature) is likely keeping some arbs away, and I think it is quite an attractive arbitrage that's currently out there. I haven't added U.S. Xpress Enterprises, Inc. to my portfolio yet, but I'm likely to do so as a few other opportunities wrap up.

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