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Knight and Swift Hookup A Win for Shareholders

Matthew Young, CFA

Full-truckload shipping specialists Knight Transportation (KNX) and Swift Transportation (SWFT) intend to merge in an all-stock deal. Both operations will continue to operate separately after the merger closes (likely in the third quarter). As part of the deal, Swift’s shares will convert into 0.72 shares of the new Knight-Swift company (via a reverse stock split), while Knight’s shares will exchange one for one. Thus, following the transaction, Swift shareholders will own 54% of Knight-Swift and Knight shareholders will own 46%. Although Knight-Swift will be the largest asset-based truckload carrier, the industry is highly fragmented and we thus anticipate no regulatory roadblocks. We also expect shareholder approval.

Overall, we consider the structure of the merger a positive development for shareholders of both firms, in part because of meaningful cost and revenue synergy opportunities. We expect to raise our fair value estimates in the ballpark of 10%-12% for Knight and 18%-22% for Swift. This reflects our initial take on the equity value of the combined entity, including most projected synergies and allocating incremental value according each firm’s stake. Our no-moat ratings for each firm remain unchanged.

While we didn’t anticipate a marriage between Knight and Swift, we think the transaction makes strategic sense and our initial take is that management’s anticipated $150 million of annual cost and revenue synergies in the years ahead is achievable. We assume it takes a bit longer to achieve that target (2020 versus 2019) given the likelihood of sluggish operating conditions persisting into the first half of 2018 or until the industry sees a healthier supply/demand balance as widespread electronic logging device adoption reduces capacity. Nonetheless, our confidence in management’s target stems from gradual truckload market improvement and the likelihood Knight will apply its best-in-class operating know-how and yield management to Swift’s truckload operations.


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