Forward Air’s stock has been pummeled since it announced its acquisition of Omni Logistics last month, but a pair of reports from two debt ratings agencies lean far more positive on the future of the transaction.
Forward Air is taking on a significant amount of debt to complete the deal. That debt has drawn ratings from two of the three key agencies, S&P Global Ratings (NYSE: SPGI) and Fitch Ratings. Forward previously had not had publicly traded or rated debt.
The ratings for both agencies on the Forward Air (NASDAQ: FWRD) debt came in at BB-. That is not investment grade but is only three notches below a rating that would be considered investment grade.
By way of comparison, XPO (NYSE: XPO), also an LTL carrier though not with an identical model, has a BB+ rating from S&P Global though an individual debt instrument drew a BBB- rating from S&P in May. BBB- is the lowest S&P rating that is considered investment grade.
At the time of the deal on Aug. 10, Omni’s enterprise value was $3.2 billion. Omni shareholders received $150 million in cash and a 37.7% equity stake in Forward. In the prior five years, its customer base had grown to 7,000 clients from 300, and it has 4,500 employees.
The debt package that Forward Air has taken on to make the acquisition of Omni consists of a $400 million revolving credit facility due 2028, which was not rated, and total debt commitments of $1.85 billion. That figure includes a $925 million first-lien term loan due 2030 and $1.16 billion in preferred stock. S&P said it was considering the preferred equity as debt in its calculations. That preferred stock is eventually expected to be converted to common equity in Forward.
In a statement supplied to FreightWaves, CEO Tom Schmitt did not comment on the level of the debt ratings. But he said that “the recent rating release from S&P is another step forward in the financing process for our combination with Omni. We are thrilled at getting close to welcoming Omni into the Forward family, which will allow us to continue to serve our domestic forwarder customers exceptionally well and at the same time compete for high value LTL business from shippers who do not work with forwarders.”
While ratings agencies theoretically do not concern themselves with the stock price of a company it is rating — and if it rates a privately held company, there’s no stock price anyway — one passage from the S&P report could almost be read as a rebuke to investors who have sunk Forward’s stock from about $111 just before the Aug. 10 announcement of the deal to a more recent price near $63.
“We expect Forward Air’s end-market diversification and scope to improve through the acquisition,” S&P wrote. “Omni’s freight-forwarding segments will complement Forward Air’s existing domestic operations, as well as diversify this segment beyond North America (more specifically the U.S.). The addition of Omni’s warehousing and distribution operations will also improve diversification, in our view.”
Wall Street’s negative reaction to the Omni deal has been driven in part by concern that freight forwarders served by Forward over the years will be put at a disadvantage to a company that had previously served them with linehaul capabilities but now effectively has become a competitor.
At the recent Jefferies Industrials Conference, Schmitt said the company needed to acquire “earned trust” from its forwarding customers. “As long as we make sure that that separate sales force still [gives] the best service, gives them every chance to keep and win business, gets them the best rates, then we just need to win together,” Schmitt said.
But the S&P report on Forward reflected none of those fears. “In our assessment, the combination of Forward Air’s asset-light model with Forward owning around 6,000 trailers and 270 tractors and straight trucks, and Omni’s asset light model will continue to allow Forward to preserve profitability and maintain financial flexibility during economic downturns, compared with its more asset-intensive peers,” the ratings agency wrote.
Fitch was somewhat more aggressive in discussing the risks of combining the two companies. “Fitch views the execution risk of adding a large new service line, freight forwarding, as elevated, particularly in the near term when it is exhibiting heightened cyclicality as a result of exposure to challenged air and ocean freight conditions,” the company wrote.
Forward’s business was described by Fitch as being “differentiated from common LTL operators by focusing on expedited or high value freight where premium quality service levels are able to capture outsized margins.” By combining with Omni, Forward will gain “direct retail access, which [Forward] estimates opens up half of the $15 billion expedited LTL market.”
With the caveat “at this point,” Fitch said the deal is seen as “neutral-to-positive to Forward’s business profile.” But it added that the deal comes with an “elevated … execution risk of adding a large new service line, freight forwarding, particularly in the near term when it is exhibiting heightened cyclicality as a result of exposure to challenged air and ocean freight conditions.”
Cost savings in the deal are estimated by Fitch to be about $70 million in EBITDA in the first three years after the deal, “largely reflecting the potential for Omni to leverage Forward’s LTL network.” What Fitch called “revenue synergies” are estimated to be $30 million in EBITDA through “cross-selling opportunities.”
S&P said its estimates are that about 60% of Forward Air’s revenue and EBITDA “will be generated from its logistics-related businesses following the acquisition of Omni. Forward’s management will look to Omni’s relationships with shippers to grow its expedited freight segment.”
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