Petroleum hauler Patriot being sold to United at solid premium

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The acquisition of publicly held tanker carrier Patriot Transportation Holding by privately held United Petroleum Transports gave a substantial boost to Patriot shareholders whose stock prior to the merger announcement was not even at the company’s book value.

In its second-quarter earnings call in May, Patriot CFO Matt McNulty said the book value of tanker carrier Patriot was $9.70. He and CEO Rob Sandlin then corrected that figure to $9.58.

But on Oct. 31, the day before the deal was announced, Patriot Transportation closed at $7.63. It shot up to $15.81 a day later when the deal was announced that United would acquire Patriot at $16.26 per share. The price of Patriot on the Nasdaq has not yet reached that level since the deal was announced.

The United Petroleum prepared statement on the deal said it is expected to close in early 2024.

According to the 8-K report filed by Patriot (NASDAQ: PATI) in connection with the acquisition by United, Patriot management has the ability to seek a better deal through Friday. However, there is a $1.86 million termination fee.

Patriot conducts its business through a wholly owned subsidiary, Florida Rock & Tank Lines. Hauling petroleum is its primary business and it mostly uses company drivers, according to the 8-K.

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According to Patriot’s third-quarter earnings report, it drove 5.71 million revenue miles in the third quarter ended June 30, up from 5.33 million miles in the third quarter of 2022. It had revenues of $24.5 million for the quarter compared to $23.5 million a year earlier.

Net income in the third quarter was 33 cents per share, up from 22 cents per share in the corresponding quarter a year earlier. It has not paid a dividend since 2020.

One notable quarter-to-quarter change in Patriot’s earnings report was that compensation costs climbed on an outright basis and significantly in terms of a percent of revenue. Third-quarter 2022 compensation costs of $9.77 million were 41.6% of revenues, but in the third quarter of 2023, the $11.26 million in compensation costs was 46.4% of costs.

The compensation costs caught the eye of analysts on the third-quarter earnings call in May. In response to one question, CEO Sandlin said Patriot’s driver count was almost 400. “We haven’t quite made it to 400, but we’re 390,” he said, adding that Patriot had “pulled back” in some markets because “we’ve saturated the market with the amount of business that we have there.

“But we still see some opportunity to move that number up to 400, and that’s what we’re trying to do,” Sandlin said.

In its earnings statement, Patriot did not break out income net of fuel surcharge revenues. But fuel costs in the third quarter fell to $2.72 million from $3.97 million in the corresponding quarter a year earlier.

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In the release published by United Petroleum about the acquisition, United said the deal would “create a top ten bulk tank carrier by revenue, with operations stretching from Arizona to Florida.” It also said the combined companies would have more than 1,000 professional drivers.

“This acquisition marks a significant milestone for UPT, furthering UPT’s and Florida Rock’s shared mission to become a top five bulk tank carrier by revenue,” United said in its prepared statement announcing the acquisition.

In a common theme heard in the trucking sector of late, McNulty said there had not been a significant reduction in capacity through petroleum haulers exiting the market.

“We haven’t seen any kind of run or rash of closures of our competitors,” he said on the call. “We’ve seen people moving out of markets like we had done in certain places.”

Ironically, Sandlin was asked on that third-quarter earnings call about merger-and-acquisition activity in the tank transportation sector. But it was from the perspective of Patriot buying a company, not being the acquired company.

“So we’re not shying away from acquisition opportunities,” he said, according to a transcript of the call. “We’ve looked at a couple of things, but we just haven’t seen anything that was the right fit for the right amount of money at this point.”

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The possibility of Patriot being the acquiring company appears to have been spurred in part by the fact that it’s got a lot of cash on the balance sheet relative to its revenues. Full-year revenues of $87.8 million for the year ended Sept. 30 are relatively low for a company with cash of more than $7 million.

Sandlin was asked about distributing the cash to shareholders if a good merger partner couldn’t be found. “I wouldn’t anticipate that,” he said. “We want to run our business and just keep doing what we’re doing. And hopefully, there’s an opportunity down the road for us. And we’ve distributed a lot of our cash already.”

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