If you're already thinking the name "Yellow Roadway" doesn't exactly roll off the tongue, brace yourself for the possibility of a Yellow Roadway USF. Early last month, the now-supersized carrier announced that it planned to acquire USF Corp. in a $1.4 billion deal expected to close this summer.
The acquisition marks the second merger in less than two years for Yellow, which purchased Roadway in 2003. But this is clearly a different kind of acquisition. By joining forces with Roadway, Yellow, a national LTL specialist, benefited from the obvious synergies associated with acquiring another national LTL specialist. Adding USF, by contrast, will strengthen its presence in the next-day and regional business, which is among the fastest-growing segments of the motor freight industry.
The announcement left shippers wondering what it all means—specifically, whether the move will trigger a flurry of consolidations involving regional LTL players. Industry analysts say they have reason to be concerned. Old Dominion Freight Line, Vitran and SCS Transportation are all said to be open to the idea of acquiring other regional players. At the same time, Vitran, CNF Inc. and Arkansas Best Corp. have all been mentioned as possible takeover targets.
Should their fears about consolidation be realized, shippers that rely on LTL service should brace for price hikes. "LTL pricing will remain strong as industry consolidation extends the conditions associated with a seller's market," predicts Michael Regan, chief executive officer of TranzAct Technologies, which provides logistics management solutions.
Andrew Gillespie, director of transportation at Ansell Healthcare Products LLC, says his company is already mulling the long-term effects of the Yellow Roadway-USF deal. As a customer of both Yellow Roadway and USF who spends upwards of $10 million a year on LTL shipping, Gillespie's company is watching the deal closely.
"I'm not worried about the next couple of quarters, but in the long run I have concerns that this could force more consolidation in the business," he says. "That could serve to limit the [number] of providers out there, which would have [upward] cost implications."
Others are more optimistic. Ellen Ruby, traffic manager for Construction Specialties Inc., a small shipper based in Muncy, Pa., says her company saw no negative fallout from the merger of Yellow and Roadway two years ago, and she doesn't expect any this time around. Ruby predicts mergers will continue because "that is how [the carriers] are realizing higher profits." Ruby says her Roadway reps (the company has kept its Yellow and Roadway brands separate) have told her that the company has recorded higher profits following Yellow's merger with Roadway and that they expect to see more of the same from the USF deal.
Worth every penny?
It's easy to see why Yellow Roadway is paying such a high premium (nearly 40 percent) for USF. The deal gives Yellow Roadway an immediate and nationwide scale in next-day and regional markets, an area where it's seeking to expand its presence. It stands to save a lot of money, too. Approximately $40 million of net synergies are expected within the first year. Longer-term synergy opportunities are estimated to be at least $150 million per year.
The merger, which has been unanimously approved by both companies' boards, will create a company with revenues of $9 billion and more than 70,000 employees and 1,000 locations. But before it can become final, the deal must be approved by shareholders and by federal and state regulators.
"With the addition of USF, we continue to accelerate our growth, earnings and positive momentum," said William Zollars, chairman, president and chief executive officer of Yellow Roadway, when announcing the deal. "Our strategic rationale for this transaction is focused on enhanced scale, complementary service offerings and significant cost synergies. Additionally, our logistics and truckload capabilities will be enhanced by the USF service capabilities."