Yellow-Roadway rumored to be eyeing 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? That’s one reaction to rumors that Yellow-Roadway Corp. was in talks to acquire USF.

When he spoke to analysts in December 2003, Bill Zollars said the combination of Yellow Corp. and Roadway Express companies would deliver $6.5 billion in revenues in 2004. When the final tally was in, Yellow Roadway Corp. hit $6.8 billion in revenues. Zollars, chairman, president and CEO of the resulting Yellow-Roadway Corp., also announced the combination captured $100 million in synergies in 2004 and he projects a further $50 million of new synergies for 2005.

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 Freight 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 that celebrated its 75th anniversary in February. The estimated operating ratio for Roadway was just below 95.

Zollars had told skeptical analysts in 2003 that Yellow Roadway would continue to operate the two national LTL networks separately, and he has done so. Certain internal operations improvements have enabled the carriers to improve densities on some lanes, but the expected combination of operations or significant network reductions have not occurred.

When a rumor surfaced this week in the Wall Street Journal that a source “familiar with the matter” said Yellow Roadway was in negotiations to acquire the recovering USF for an estimated $1 billion, neither carrier was ready with a comment.

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.
The USF condensed consolidated balance sheet showed total assets of $1.4 billion at the end of 2004.

Questions about the feasibility of an acquisition have to look at the market conditions. North American 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, said 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%.

Morgan Stanley analysts don’t comment on rumors. However, a Bear Stearns analyst, Edward Wolfe, calls the rumored deal “counter-intuitive.”
From an operations perspective, the Bear Stearns comment would seem on target. For one thing, 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.

The other question is where another LTL operation would fit into Yellow Roadway. Would the company attempt to create a network of regional LTL operations similar to CNF’s Con-Way Transportation? USF closed its Red Star operation in the Northeast where New Penn operates, producing an operating ratio in 2004 of 87 on 20% revenue growth.

The rumor could be wrong, and Yellow Roadway could be looking at selected assets of USF, but the fact that USF has embarked on an aggressive rebuilding campaign to improve operations and customer service would appear to offer Yellow Roadway more risk than reward as it continues its integration process.

In the end, the only thing that is clear is that shareholders may have made a short-term gain on the spike in both companies’ stock prices while the rumor has remained current.


www.yellowroadway.com

www.usfc.com

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