Canada’s largest trucking company, TransForce Inc., is set to become a national powerhouse in the specialized trucking business with a proposed friendly takeover of Ontario-based Contrans Group.

Contrans provides bulk, tank, flatbed and other transportation services in Canada and parts of the United States.

It’s expected to complement the various types of services provided by TransForce subsidiaries that are involved in package and courier deliveries, trucking and waste management.

“This is really the creation of a dominant player in Canada,” said TransForce chairman and CEO Alain Bedard.

The proposed transaction caused TransForce’s shares to hit an all-time high of $27.64 in Friday trading on the Toronto Stock Exchange. They were up more than nine per cent or $2.28 at $27.46 in later trading.

The Montreal-based trucking company announced late Thursday that it had struck a deal to acquire Contrans Group Inc. for $495 million in cash plus $85 million of debt. That imples Contrans has an enterprise value of $580 million.

The board of Contrans, based in Woodstock, Ont., is unanimously supporting TransForce’s offer of $14.60 per share cash, which is conditional on at least two-thirds of the outstanding class A and B shares being tendered. Contrans CEO Stan Dunford, 64, would join TransForce’s board.

In addition to the money from TransForce, Contrans shareholders would receive a special dividend of 40 cents per share, bringing the total amount that they receive to $15 per share. Funds for the special dividend would come from the recent sale of the Contrans waste transportation segment.

Contrans already lean

Bedard said he expects to realize at least $15 million cost savings, partially from eliminating Contrans costs as a public company and $10 million in operational savings, without resorting to layoffs among Contrans’ 1,400 employees.

Unlike past acquisitions of underperforming companies, TransForce views Contrans as a “lean and mean machine” that doesn’t require any changes that could scare away key employees.

“I’m buying the company in my mind at a huge price. (It’s) fair, agreed, but it’s a lot of dollars, lots of investment. So I’m not going to change the recipe,” Bedard said during a conference call with analysts.

The deal was consummated after financial advisers for Contrans approached TransForce with a price, which the company accepted. It represents a 16.7 per cent premium to the 52-week volume weighted average trading price but only 5.1 per cent premium to the value of shares over 10 days before the deal was announced.

Most analysts believe Contrans shareholders will approve the transaction, which is expected to close in the fall. But Maxim Sytchev of Dundee Securities said some shareholders may ask for more.

Specialty trucker

Bedard said he has no plans to go higher, preferring to turn his sights on the United States if Contrans shareholders balk.

He said the combination will create a more efficient company that will be good for the Canadian truckload industry. Contrans is the largest specialty trucker in Ontario while TransForce is strong in Quebec.

“It’s going to be to the benefit of everybody: our employees, our customers, our shareholders,” he said in an interview. “Combining under our own family is fantastic for everybody.”

TransForce has engaged financial advisers about the possibility of spinning off the enlarged truckload business as a separate public company. It would one of the largest in North America with $1.8 billion in annual sales and $250 million in EBITDA.

The company is also looking to unlock the value of its profitable waste management business.

Benoit Poirier of Desjardins Capital Markets said the further consolidation of the Canadian trucking markets should improve TransForce’s pricing power. He estimated the acquisition could add 15 to 20 cents per share in earnings for TransForce over the long term, representing $2 to $3 per share in value to the company’s stock price.

 

Here’s the Transforce press release:

 

Montreal, Quebec and Woodstock, Ontario, July 24, 2014 – TransForce Inc. (TSX: TFI, OTCQX: TFIFF), a North American leader in the transportation and logistics industry, and Contrans Group Inc. (TSX: CSS), a diverse provider of specialized transportation services, today announced that they have entered into a Support Agreement for the acquisition by TransForce, for $14.60 in cash per share, of all of the issued and outstanding Class A subordinate voting shares and Class B multiple voting shares of Contrans by way of a friendly, Board-approved take-over bid (the “Offer”).  The total equity purchase price is approximately $495 million.

The Support Agreement provides that if all conditions of the Offer have been satisfied or are waived by TransForce, Contrans will declare a special dividend of $0.40 per share in respect of the recent sale of its Waste Transportation segment.  Together with the $14.60 per share Offer price, the total consideration of $15.00 represents a premium of approximately 16.7% to the 52-week volume weighted average trading price of Contrans’ Class A shares on the Toronto Stock Exchange and a premium of approximately 5.1% to the volume weighted average trading price of Contrans’ Class A shares for the ten trading days ended July 24, 2014.  The special dividend will be paid to Contrans shareholders of record immediately prior to TransForce taking-up and paying for tendered shares under the Offer.  As a result, Contrans shareholders who tender their shares to the Offer will receive the special dividend, if paid.

The Board of Directors of Contrans, after consultation with its financial and legal advisors, has unanimously approved entering into the Support Agreement and unanimously recommends that Contrans shareholders tender their shares to the Offer.  Cormark Securities Inc., the financial advisor to Contrans, has provided a fairness opinion to the effect that, as of the date of the opinion and subject to the limitations and qualifications therein, the consideration of $14.60 in cash per share to be received by Contrans shareholders is fair, from a financial point of view, to the Contrans shareholders.

All of Contrans’ directors and executive officers, holding in the aggregate 100% of Contrans’ Class B shares and approximately 14.1% of its Class A shares, have entered into “soft” lock-up agreements with TransForce, pursuant to which they have agreed to tender all of their Contrans shares to the Offer.

“I have admired the progress of Contrans for some time.  Contrans has a culture similar to that of TransForce, strategically acquiring companies that add value for its shareholders.  Contrans has a history of profitability, is financially sound and has seen steady growth over the years.  From transportation facilities located mostly in Canada, Contrans offers customers a wide array of specialized services.  This acquisition provides exciting potential for TransForce, adding strong resources, an excellent client base, and importantly, very strong management,” said Alain Bédard, Chairman, President and Chief Executive Officer of TransForce.

“TransForce has a significant market presence that will benefit our operations and possesses many of the same values that have allowed Contrans to operate successfully.  I believe the entrepreneurial culture of Contrans will fit in well with TransForce.  I am proud of Contrans’ management’s accomplishments over the past 25 years and look forward to seeing the team continue to flourish as part of the TransForce organization,” said Stan Dunford, Chairman and Chief Executive Officer of Contrans.

The Offer is not subject to any financing condition.  TransForce has entered into a commitment letter with National Bank of Canada and Royal Bank of Canada to ensure that the required funds will be available to make full payment to complete the Contrans acquisition pursuant to the Offer.

The Support Agreement contains customary deal protection provisions in favour of TransForce for a transaction of this kind.

The Offer is expected to commence on or about August 21, 2014.  TransForce will mail a take-over bid circular and related documents, and Contrans will mail a directors’ circular, to Contrans shareholders in accordance with the Support Agreement and applicable laws.  The Offer will be open for acceptance for a period of not less than 35 days and will be conditional upon, among other things, there being validly deposited or tendered and not withdrawn, a number of Contrans shares that represents at least 662/3% of the outstanding Class A shares and at least 662/3% of the outstanding Class B shares, and at least a majority of the outstanding Class A shares, the votes of which would be included in any minority approval of a subsequent acquisition transaction by TransForce, pursuant to applicable securities regulations.  The Offer will be subject to certain customary conditions, including receipt of relevant regulatory approvals and the absence of any material adverse changes with respect to Contrans.  Once the minimum acceptance level for the Offer is achieved, TransForce intends to take steps available to it under applicable law to acquire all other outstanding shares of Contrans.

Following successful completion of the Offer, TransForce intends to nominate Stan Dunford, Chairman and Chief Executive Officer of Contrans, for election to the TransForce Board of Directors at the next annual meeting of TransForce’s shareholders, expected to be held in April 2015.

National Bank Financial Inc. is acting as financial advisor and Fasken Martineau DuMoulin LLP is acting as legal counsel to TransForce in connection with the Offer.  Cormark Securities Inc. is acting as financial advisor and Cassels Brock & Blackwell LLP is acting as legal counsel to Contrans.