R | Of All The Things That Never Happened, This Never Happened The Most
We are skeptical that Apollo, one of the most sophisticated finance firms, is looking at buying R now. And we’re skeptical that it just happened to leak into quarter end. It sounds credible because one buyout firm was looking at R back in March and April of 2022. Ryder didn’t engage, and the matter dropped as transport markets softened. We thought it was such a silly ‘peak’ idea, we didn’t address it in our black book call. Why would a PE firm buy a leveraged cyclical that already has a bunch of debt and doesn’t generate free cash flow except in the boom periods for used truck prices? We assume R management turned them down because it would be a nightmare for the firm…sure, let’s add leverage to an already leveraged firm at cycle peak trying to run it for cash on the downswing. Great plan.
Since the initial mediocre suggestion of an R buyout, the rationale for a deal has deteriorated markedly. Junk credit spreads have blown out. If the deal didn’t make sense at 4.5% debt, why would it make sense at 7%? It is one of the worst moments in a decade for a R LBO valuation, at least using market inputs. Some of Ryder’s bonds can be put back into the company in the event of change of control. The March 2027s are trading under 90 and would get, as we read it, 101. R’s new owners would have to replace that debt at a much higher rates, like a rough 300 bps to 500 bps higher. Not great for the LBO modeling relative to April…when another LBO firm could have jumped in with a higher number or otherwise more compelling offer. None did.
What about R’s end markets? FedEx said last week that transport markets have deteriorated sharply in the last few months. This market is vastly less attractive than it was six months ago…and it is usually pretty unattractive.
We doubt that a sophisticated investment firm would miss the financial tailwind high used truck prices brought to R’s P&L and investing cash flows, or that truck prices have declined since the first buyout suggestion. There is little chance that the operations haven’t gotten meaningfully worse since the initial interest.
Used truck prices, down since May/June 2022, will almost certainly be down on a YoY basis by year-end. R’s apparent low valuation is an artifact of selling used trucks for gains…because truck prices happened to (roughly) double in the year ended March 2022. That isn’t a sustainable or recurring source of earnings and cash flow. In fact, it is a bad business development – trucks are what R owns and manages. Having higher cost trucks is a long-term negative for the quantity and return of those assets. It just happens to flatter 2022 financials until higher cost replacement trucks enter the chat.
Is there some great value unlock story at Ryder? Ryder isn’t some unknown business with hidden assets management has missed, at least from what we see. Every asset-based transport wants a logistics business that can prop up its equity valuation. They all can’t be unique value creation stories. Those businesses make sense primarily as part of a bigger carrier. We don’t buy the sum-of-the-parts theories; they aren’t new and generally don’t work. Besides, there are easier ones than R.
Presumably, a buyout owner would ‘run it for cash’ because R has a low EV/TTM EBITDA or whatever…partly because of used truck gains. Ryder always trades at a low EV/EBITDA because it is a poor valuation metric for a company that “has to” spend the depreciation; it is always cheap for a reason. It isn’t like R can just not buy trucks when customers need trucks. There are a number of problems with actually running this business for cash that would cause such a strategy to devolve rapidly. In 2020, capex could be low because customers were on board with smaller fleets. Truck supply constraints held capex back in 2021/2022. If anything, fleets have some deferred spending and placed orders for delivery in coming quarters.
Basically, Apollo could have bought Ryder with cheaper debt, better business trends, and an equivalent price at just about any time in the last year without leaks into quarter-end. With equity valuations of many potential targets reset far, far lower, why would they go after Ryder now? If a recession is coming, why acquire an asset-based transport company with substantial leverage and deferred capital spending? We expect the economy to be sodded with transport capacity by 1Q23.
While we can’t rule a transaction out and PLENTY of bad LBOs have happened at cycle peaks before, this is past the R cycle peak; the debt is too expensive right now. It is more likely that a holder or trader wanted better quarter-end performance and saw the LBO story as credible, or at least hard-to-refute intraday. We’re sure the regulators will get right on it. If Apollo is serious and reading this, we’d suggest getting unserious – Ryder has been like this forever. OC would be an easier target…and could use the management help…and has parts that could go to interested private buyers right away.
Q&A Call Slides Link: CLICK HERE
2 Sigma Table
