Covenant Logistics Group, Inc. is selling its factoring business for $132.2 million to help cut the overall debt for the Chattanooga-based trucking giant.
The deal announced Wednesday is expected to generate a pretax gain in the company’s third quarter between $34 million and $38 million.
Covenant said it sold the transportation factoring assets of its Transport Financial Solutions segment to Triumph Business Capital, a subsidiary of Triumph Bancorp, Inc. in Dallas.
Freight factoring is when a carrier sells the invoice for a load they’ve hauled in order to get cash immediately, instead of waiting many days it usually takes for a broker to pay. Since its creation in 2011, Covenant has grown its factoring business “and delivered consistently strong margins and returns,” Covenant CEO David Parker said.
“With a critical mass of over $100 million of capital deployed and strong growth opportunities, it was time to transition the business to an owner with a core lending focus and deep knowledge of the transportation industry,” Parker said. “We are confident Triumph is the right partner for TFS’ clients going forward. The ability to pay down over $120.0 million of debt in the near term is consistent with our goals of significantly reducing our leverage and concentrating our business model on services and sectors where we can add considerable value to our partner-customers in the U.S. logistics industry.”
The transaction was structured as a sale of TFS’ factoring assets, consisting primarily of $103.3 million of net accounts receivable and related transportation factoring assets. In exchange, Covenant received cash proceeds, net of transaction expenses, totaling approximately $107.5 million, plus Triumph common stock valued at $13.9 million, and the opportunity to earn contingent cash consideration of up to $9 million a year from now.
The parties also entered into an ongoing referral arrangement.
The third quarter gain from the sale of business unit is expected to modestly exceed the net amount of multiple second quarter gains, impairments, and expenses Covenant is taking due to the sale or exit of certain real estate, downsizing unprofitable operations, reallocating fleet assets toward contract logistics operations, and other actions consistent with the strategic plan.
Ahead of Wednesday’s announcement, shares of Covenant Logistics rose 10 cents per share, or 0.7%, to close at $13.95 in trading on the Nasdaq exchange.
David Parker, the founder and CEO of Covenant Transport, speaks as they celebrate the expansion of Covenant Transport Solutions into a new 16,000-square-foot North Shore location on Wednesday, April 3, 2019 in Chattanooga, Tenn. Covenant Transport Solutions, the freight brokerage business that Covenant began in 2006, relocated March 1 into the second floor of the Signal Mill building. / Staff photo by C.B. Schmelter