Yellow Roadway to acquire USF for $1.37 billion

Yellow Roadway Corp. has entered into a definitive agreement to acquire USF Corp., for approximately $1.37 billion. Yellow Roadway will also assume an expected $99 million in net USF debt, resulting in a total enterprise value of approximately $1.47 billion.

The acquisition, which is expected to close in summer 2005, will create a combined enterprise with annual revenue in excess of $9 billion, with over 70,000 employees and 1,000 service locations. In addition, the combined entity will offer customers a broad range of transportation services including next day, inter-regional, national and international capabilities.

"This is a case of opportunity knocking twice," says Bill Zollars, chairman, president and CEO of Yellow Roadway. "USF represents an opportunity to leverage the successful strategy that was employed with Roadway. When applied to USF, this includes maintaining the strong separate brand identities, customer interfaces and distinct operations of each business unit."

According to Zollars, USF provides Yellow Roadway with immediate and nationwide scale in next-day and regional markets. Additionally, Yellow Roadway’s logistics and truckload capabilities will be enhanced by the USF service capabilities.

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 proprietary Truckload Freight Index was already indicating the number of trucks on the road was increasing while the seasonal pick up in demand that is common in February was more modest than in recent years. This, says Morgan Stanley, led to slowing trends in the Truckload Freight Index.

An earlier review and outlook by Morgan Stanley indicated long-term revenue growth for the national LTL segment, where Yellow-Roadway and USF compete, was the lowest of the three motor carrier industry groups at 0-5%.

Both Yellow Transportation and Roadway Express had divested of non-union operations in recent years. USF includes both unionized and non-union motor carrier operations. Zollars says he talked to Teamster general president Jim Hoffa, who was “encouraged” by the news. In a statement issued by the International Brotherhood of Teamsters, Hoffa says the union would 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,” Hoffa says.

Zollars says Yellow-Roadway had a labor strategy for the transition, but it was too early to discuss it in detail.

The transaction is expected to be accretive to Yellow Roadway earnings per share within 12 months of closing. Approximately $40 million of net synergies are expected within the first twelve months along with run rate synergies of $80 million per annum after the first twelve months. Longer-term synergy opportunities are estimated to be at least $150 million per annum in total.

The transaction is subject to the approval of shareholders of both companies. In addition, the acquisition is subject to the expiration or termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and other customary closing conditions.

Upon the closing of the transaction, the following individuals will lead the key divisions of the combined entity and report directly to Zollars:

Jim Staley, current president of the Roadway Group, will become president of the Yellow Roadway regional companies, which will include New Penn Motor Express, USF Holland, USF Reddaway, USF Dugan and USF Bestway. Staley will also be responsible for the truckload unit of USF, Glen Moore.

Bob Stull, who currently reports to Jim Staley as president of Roadway Express, will continue in that role and report directly to Zollars.

James Welch, president of Yellow Transportation, will continue in that role.

Jim Ritchie will continue as president of Meridian IQ, the logistics unit of Yellow Roadway, which will include the operations of USF Logistics.

Mike Smid will remain as president of Yellow Roadway Enterprise Services and chief integration officer.

www.yellowroadway.com

www.usfc.com

www.morganstanley.com

www.teamster.org

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