Analysis: What's behind Yellow Roadway's plan to acquire USF

Strong volumes and tight truckload capacity helped the Yellow Roadway Corp. companies deliver promised results, but is there value in stepping back into the pool and taking on another acquisition? Bill Zollars, chairman, president and CEO of Yellow Roadway, thinks so, and he has promised to deliver similar " synergy savings" in a pending deal to acquire USF Corp.

Yellow Roadway's eyes are clearly on the overnight and next-day markets dominated by regional less-than-truckload (LTL) carriers. Yellow Transportation recently announced an overnight service which it will continue. Similarly, USF will continue to promote and offer its longer haul product USF Premier Plus inter-regional service. Zollars calls this "healthy competition" and likens it to operating Yellow Transportation and Roadway Express as separate entities under the Yellow Roadway umbrella.

Asked whether this was an offensive or defensive move, Zollars says Yellow Roadway is adopting an offensive strategy to enter a market that is growing faster than the long-haul market served by both Yellow and Roadway. Unlike the two national LTL carriers, which had a 15% overlap in customer base, USF has no overlap with either of the longhaul companies. That said, the geographic overlap exactly matches.

An advantage for USF is that Yellow-Roadway's regional LTL carrier New Penn already operates in the Northeast, a market in transition for USF after it shuttered its USF Red Star operation in 2004. No doubt, New Penn was one of the beneficiaries of that move, and shippers and consignees in the region will be tied back into the USF network. New Penn had an operating ratio in 2004 of 87 on 20% revenue growth.

On the financial side, the cash and stock offer is valued at $1.37 billion. Zollars expects synergy savings in the first year of $40 million and a run rate of $80 million in synergies.

Aided by a strong market with increasing volumes and tight truckload capacity, the latter driving an estimated 4% to 6% of the LTL volume, Yellow Transportation produced a record $3.2 billion in revenues in 2004 and achieved an operating ratio of 94.1. Roadway Express provided an additional $3.1 billion, also record performance for a company celebrating its 75th anniversary this year. The estimated operating ratio for Roadway was just below 95.

USF reported 2004 revenues of $2 billion from its LTL operations and another $134 million from truckload operations. Though both carrier operations were ahead of the prior year, less money made it to the bottom line. LTL operations reported a net income of $93 million, down from $110 million in 2003. Truckload reported profits of $3.3 million, down from $4.7 million in 2003.

Questions about the feasibility of an acquisition have to look at the market conditions. Equity research firm Morgan Stanley estimates that 4% to 6% of current LTL volumes are the result of truckload diversions. As capacity in the truckload sector increases over the next 12 to 18 months, much, if not all, of that volume will return to the truckload sector. Morgan Stanley's Truckload Freight Index indicates the number of trucks on the road is increasing while the seasonal pick up in demand that is common in February was more modest than in recent years. This has led to slowing trends in the Truckload Freight Index.

Morgan Stanley also indicates longterm revenue growth for the national LTL segment, where Yellow Roadway and USF compete, is the lowest of the three motor carrier industry groups at 0%-5%.

Both Yellow Transportation and Roadway Express divested non-union operations in recent years. USF includes both unionized and non-union motor carrier operations. Jim Hoffa, president of the International Brotherhood of Teamsters, says the union will do everything it can to protect the job security of its members: "We will carefully monitor the ending deal and do our own analysis so that our members' interests are protected."

The deal must be approved by shareholders of both Yellow Roadway and USF and by regulators. Zollars expects the filing to be complete around April 1.

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