Transportation businesses due to ownership of fleets i.e. trucks, planes, ships, and other vehicles are often capital intensive and due to which we value them on basis of enterprise value to EBITDA comparables.

Swift Transportation and Knight transportation were the two largest transportation businesses in the USA with revenues of $4 bn and $1.2 bn respectively Swift & Knight decided to merge to create a $6 bn truck transportation behemoth.

As per the deal terms, Knight shares were valued at 46% and Swift shares at 54% of the Equity market value of the combined entity.

We calculate the net debt of both companies and subtract from the enterprise value of the combined entity which is 6 billion to get the market value as 4.9 billion.

Now we will calculate the market value of Knight & Swift independently and add back their respective net debts to obtain independent enterprise values.

By dividing with their respective EBITDA, we see that Swift was valued at 7 times and Knight at 8.4 times EBITDA

Why is Knight valued at a premium of 20%? From multiples of public trucking companies in the US at the time of the merger, we see that the market gives premium valuation to companies which have higher profitability margins and larger revenues

Swift with a 7.6% EBITDA margin is comparable to Arc Best and Celadon with multiples between 6.5 times to 6.8 times. But given its significant revenues, it’s 7 times multiple is reasonable

Knight with 24% EBITDA multiple is comparable to the trucking companies with double-digit margins and its valuation is also in line with the median valuation of high margin trucking businesses