While 2018 began with some uncertainty as North American Free Trade Agreement talks languished and the Canadian Transportation and Logistics sector grappled with the capacity constraints it faced in 2017, the year saw healthy deal activity.
Looking at deal value (CA$6.4 billion) in 2018, major transactions involving companies like Aimia Inc. (CA$2.3 billion), Student Transportation Inc. (CA$1.3 billion) and the A25 bridge in Montreal (CA$858 million) helped deliver a 206.9% increase over 2017 (CA$2.1 billion). But in terms of deal volume, activity fell by 13.2% to 59 deals from 68 the year before.
Reflecting the e-commerce boom and important trade agreements negotiated by Canada, many of the deals in 2018 focused on moving goods to Canadians, with 47.5% falling in a classification that includes courier, postal, air, ground and marine freight and land-based logistics, as well as highway and rail activities.
Investments on the corporate side included Canadian National Railway Co. (“CN”), which raised CA$2.85 billion in 2018 to expand its rail network capacity. On the public side, both the federal and provincial governments have been investing in infrastructure and improvements to cargo capacity, with developments like the National Trade Corridors Fund and Cargo M in Montreal leading the way on enhancements to Canadian ports.
In another noteworthy development, shipping giant Maersk highlighted plans to make Montreal a strategic gateway to Canada. Maersk has predicted Canadian trade volumes will jump by another 7% in 2019, primarily driven by the Canada-European Union Comprehensive Economic and Trade Agreement (“CETA”).
Technology was a significant focus for Canada’s Transportation and Logistics sector throughout the year. Transport Canada, for example, moved to jointly fund an artificial intelligence project with the Port of Montreal. The port is also working on a blockchain initiative to streamline freight shipping.
Towards the end of the year, deal activity in the sector was relatively quiet, with no major transactions in the fourth quarter of 2018. Deal volume fell by 50% on a quarterly basis to nine transactions in Q4 2018 from 18 deals in Q3 2018. Deal volume in Q4 2018 was down by 35.7% on a year-over-year basis from 14 deals in Q4 2017. Deal value also declined, falling to CA$302.5 million in Q4 2018 from CA$2.8 billion in Q3 2018 (largely reflecting the Aimia transaction) and from CA$640.8 in Q4 2017.
Noteworthy investments included CN’s acquisition of the TransX Group of Companies, a Winnipeg-based long-distance trucking firm. CN also made an offer to acquire a stake in Halifax-based Halterm, the biggest container terminal in Eastern Canada.
Through that deal, CN is hoping to repeat its success in Prince Rupert, B.C. As is the case with the B.C. port city, Halifax's location, together with CN’s extensive network, would help it offer faster transit times to destinations in the United States versus direct shipping through more congested US ports. CN said it would potentially look at another port in Nova Scotia or Quebec if the Halterm transaction fails to materialize.
Looking ahead to 2019, while we believe that while the Canadian Transportation and Logistics sector will see another good year, there are a few issues to pay attention to:
Given that Canada is a net importer of steel and aluminum, current US tariffs on those products may affect the sector’s growth prospects. While steel and aluminum exports to the United States represent only 2% of Canada’s total exports, the ripple effect of increased prices will affect many sectors, including Transportation and Logistics.
At the same time, the new United States-Mexico-Canada Agreement has eased some of the uncertainty around trade. In terms of changes included in the deal, the increase in the de minimis threshold for paying taxes and duties on imports of consumer goods to Canada is one of the developments that will have a positive impact on the Transportation and Logistics sector.
Other trade issues making their mark include the Canada-European Union agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which took effect at the end of 2018. We anticipate more consolidation in the sector as bigger players try to solidify their standing.
It’s no secret that developed economies around the world are dealing with new workforce dynamics, notably an aging cohort of workers nearing retirement. It’s a trend that will play out in many ways, and the trucking industry, which has a perennial driver shortage, continues to experience inflationary pressures.
While 2018 saw the Port of Montreal investing in artificial intelligence and participating in blockchain developments, the Transportation and Logistics sector will need to continue to make such investments, especially given new trade deals and the push to use technology to drive efficiencies. With that in mind, we believe technology will have a significant influence on Transportation and Logistics deals in the coming year.
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