Key forces driving change in the North American transportation sector
Author
Supply chain snarls, increased focus on climate change and broad new regulatory initiatives: these are some of the accelerating forces transforming the North American transportation sector as it emerges from the pandemic. These forces present both challenges and opportunities that are likely to fundamentally affect the evolution of businesses and transaction activity across the sector. Many of these themes have been apparent in the contested transaction to acquire Kansas City Southern railway (KCS) that continues to play out. Both suitors, Canadian Pacific and Canadian National, envisioned a bold US$30 billion transaction to create the first railway to span North America and connect rail networks and ports in the United States, Canada and Mexico.
Supply chain, freight and logistics
The pandemic and ensuing recovery have brought to the forefront the vital role that freight transportation and logistics play throughout the economy. Businesses involved in shipping, ports, rail, trucking and last mile logistics have all faced significant simultaneous operational challenges and growth in demand. This has resulted in meaningful M&A activity in 2021 that looks set to continue through 2022 and beyond as operators seek to consolidate and build the scale necessary to continue significant investments to address bottlenecks and increase capacity.
Nearshoring
Through the pandemic experience, many businesses (and governments) realized that having shorter supply chains with North American manufacturing capabilities would result in more flexibility and resilience to withstand future disruptions. This was an important factor that the parties involved in the KCS transaction were seeking to capitalize on. The attractiveness of relocating overseas manufacturing to North America, particularly to Mexico, will require further development of transportation and logistics systems. This is likely to drive further transaction activity as additional transportation capacity and other systemic solutions will be required.
Climate change and EVs
Climate change concerns continue to accelerate change in the transportation sector. Key developments include greenhouse gas reduction initiatives through conventional means and the reimagination of transportation systems as part of the electric vehicle revolution. The change is exemplified by the symbolism of dignitaries to the recent COP 26 conference in Glasgow, Scotland traveling in a fleet of BYD ADL Enviro400 EV electric double deck buses manufactured by a subsidiary of TSX-listed NFI Group Inc. NFI Group is a global leader in designing and manufacturing buses with electric and hydrogen fuel cell propulsion systems. These vehicles are becoming increasingly advanced and constitute part of a reimagined transportation system including electric charging infrastructure and available artificial intelligence-based driver assist systems.
Developments in the EV space are generating significant transaction activity. Vehicle manufacturers and transit authorities will need significant financing to fully develop the required technologies and infrastructure solutions. M&A activity in the EV space has surged, including via significant de-SPAC transactions such as the US$500 million acquisition of Québec-based Lion Electric, a manufacturer of electric trucks and buses, by Northern Genesis Acquisition Corp., which was completed earlier this year.
Climate change is a theme also being reflected in conventional transactions, with one of the key selling points of the KCS transaction being the relative energy efficiency of rail transportation and the ability of a business combination with KCS to materially displace truck traffic along the Mexico to Canada transportation corridor. We can expect more focus on M&A activity helping to meet climate change objectives, as parties seek to demonstrate their climate change and ESG credentials.
Increased government involvement
The transportation sector has traditionally been an area of significant government involvement given its importance in public policy terms. That involvement is set to grow as governments announce significant investments in infrastructure and electric vehicle programs, while also seeking to extend their regulatory oversight. For example, the transformational US$1.2 trillion United States Infrastructure Investment and Jobs Act will significantly increase funding for transportation infrastructure and electric vehicle projects. Similar measures are being pursued in Canada including a landmark program by the Canadian federal government announced earlier this year that will result in C$14.9 billion being invested in Canadian public transit, C$2.75 billion of which is to be dedicated to zero-emission transit.
At the same time, governments are looking to take a more assertive regulatory posture in the transportation industry. On July 9, 2021, President Biden signed a major executive order entitled “Promoting Competition in the American Economy.” Among other things, the Executive Order specifically targets the transportation sector and directs federal agencies to take specific steps to address perceived anticompetitive practices and foster competition in the airline, rail and shipping sectors. We expect regulators in Canada to increase their focus on similar themes in the Canadian transportation industry. These measures are likely to complicate M&A transactions and lead to increased regulation of operational matters that will impact the business transformation and organic growth of existing industry participants.
We can expect to see these key forces driving the significant transformation of the transportation sector over the coming years. While providing key transaction opportunities, they will also pose important challenges through the need to address climate change and navigate increased governmental regulation in the sector.