United Parcel Services, Inc. (UPS) has reached a definitive agreement to acquire LTL carrier Overnite Transportation Co. for a cash transaction of $1.25 billion— which represents a 46% premium.
The acquisition, expected to close during the third quarter of 2005, will give UPS its first major foothold in LTL and marks a significant step toward positioning itself as a one-stop transportation business.
“We want to offer our customers the broadest portfolio of transportation and logistics services available from a single source and this is an important capability that we needed to have,” said UPS chairman & CEO Mike Eskew. “Overnite is a perfect strategic fit for our company.”
“We are pleased that UPS recognizes our commitment to quality service, our broad nationwide coverage and a trained and motivated workforce,” said Leo Suggs, Overnite’s chairman, president & CEO. “We are confident in our ability to help UPS broaden its diverse service portfolio to its customers.”
Overnite is expected to retain its management team after the deal closes.
UPS’s big move into LTL mirrors FedEx’s earlier acquisitions of Viking Freight and American Freightways Corp.—which were re-branded into FedEx Freight in 2002. American Freightways was purchased at a 61% premium for $950 million in cash and stock in 2000.
FedEx Freight had posted robust growth, according to FedEx’s most recent earnings report for the quarter ended Nov. 30, 2004. FedEx Freight reported a year-over-year revenue increase of 23% to $820 million, a 55% jump in operating income to $102 million, and expanded its operating margin to 12.5% from 10%.
“We’ve wanted to [enter LTL at this time] because the industry has become very attractive,” Norman Black, UPS spokesperson told Fleet Owner, adding that UPS has been eyeing LTL for over 10 years. “We’ve been competing about as aggressively as you can with FedEx on the package side and now in LTL we’ll be a competitor.
“[LTL has become] attractive because of consolidations and watching the survivors grow and flourish as they’ve been improving operating ratios and developing new types of services customers respond to—especially in time-definite delivery options,” Black continued. “That is what Overnite has been forefront of and that’s a huge trend in commerce now. Certainly we see it in the package world.”
“FedEx is making pretty good money in the LTL business,” analyst Chris Brady, president of Commercial Motor Vehicle Consulting, told Fleet Owner. “With UPS, you’re talking a giant entering the business. They have the resources to fund what they want to do and [LTL is] going to be more competitive.”
UPS expects to grow the customer base of the two companies thanks to the deal, Black said. He stressed that Overnite will remain its own operating subsidiary. “Absolutely we believe there will be synergies. Overnite has large- to mid-sized customers, which is the focus we’re interested in. Today there are plenty of customers out there that need freight movement in addition to the package side.”
UPS declined to comment on whether it plans to acquire more LTL carriers, but Black said, “Overnite is a large national carrier— there’s no question what we’re getting with this purchase and by that I mean there are no geographic holes with what Overnite offers.”
Overnite serves over 60,000 customers in the U.S. as well as in Canada, Puerto Rico, Guam, the U.S. Virgin Islands and Mexico. UPS said it is too early to comment on whether Overnite will be re-branded.
Satish Jindel, president of transportation consulting firm S.J. Consulting, said that UPS will likely see a good return on the purchase. “The premium is well-deserved when you consider what’s happened in this market,” Jindel told Fleet Owner, pointing to the premiums FedEx paid in building FedEx Freight. “Many people thought they paid too high a premium but you have to look at what it takes to get deals in LTL because the market is consolidating.”
UPS’s Black acknowledged the high price agreed to for Overnite. But even in the face of a U.S. economy that seems to be slowing down, he is optimistic about growing the LTL business as well as UPS’s prospects for becoming a global transportation and logistic provider.
“We think this industry is entering one of its brightest periods,” Black said. “You always worry about the economy slowing but you also have to keep in mind the U.S. economy is very dependent on transportation and specifically on trucking to move all the goods needed to manufacture products and move the goods. The fact that some economists are concerned about how fast the economy is growing doesn’t change the role transportation plays in this economy. Certainly it can be a cyclical business, but it’s much less so now than it used to be— particularly because of the consolidation of industry and the reliance on trucking.”
The transaction will require regulatory approval and the approval of Overnite’s shareholders. The Overnite board of directors has unanimously approved the agreement and has recommended approval by its shareholders.