Opinion: The 2001 Merger Games

By Jonathan S. Reiskin

taff Reporter

Y2K ended for trucking, not with a digitally-induced apocalypse, but with two super-mergers, one for each of the two major sectors of the industry, truckload and less-than-truckload.

The thumbnail analysis for comparing the two deals is to note that FedEx Corp. (FDX) will pay $1.2 billion for American Freightways (AFWY), whereas Swift Transportation Co. (SWFT) will have to pony up only $383 million for M.S. Carriers, Inc. (MSCA). Therefore, long division tells us, the FedEx acquisition is 3.13 times more important than Swift’s.

That is simple, easy, to the point — and completely wrong.

Although a smaller amount of stock, and no cash at all, will change hands in the truckload deal, I have the suspicion that Swift-M.S. will wind up having more of an impact upon the industry than FedEx-AF, the LTL transaction.

Playwright and bon vivant Oscar Wilde, who died under sad circumstances before trucking became a major industry, told why this is so. A cynic, he said, is someone who knows the price of everything but the value of nothing. Look not to the prices being paid, but to the value being created.

Using its Viking Freight subsidiary as a well-poured foundation in the West, FedEx is digging into its deep pockets to buy a whole house and slap it on top. There is no need for the company to expand Viking slowly across two-thirds of North America when it can quickly and easily add American Freightways to the fleet.

Once the acquisition is sealed, FedEx will have an LTL network serving the entire nation, except for Montana and Wyoming. It should generate annual revenue of $1.6 billion and profits in excess of $70 million.

The deal has been praised throughout the industry and could lead to plumper dividend checks for FedEx shareholders in years to come. Although national in scope, the FedEx LTL division will specialize in regional hauls. This, rather than the long-haul market, is the type of business Wall Street analysts tout as being the big money maker in the LTL sector.

As for the truckload guys . . .

Swift chairman Jerry C. Moyes is not entering a new line of business. He is sticking to what he knows best: dry van truckload carriage. Therefore, he does not have to buy the lion’s share of a national carrier.

Swift is already a decent-sized empire unto itself, with Phoenix as Rome. The carrier’s purchase of M.S. adds a substantial eastern or Byzantine half to this Roman Empire of trucking. (Here’s an opportunity for local journalists to expound on the similarities between Memphis — the home of M.S. Carriers — and ancient Constantinople.)

Once combined, the reconfigured Swift will have annual revenue of about $1.9 billion and net income of about $84 million — numbers that slightly exceed those for the AF-Viking division of FedEx.

Again, though, there is more to life than numbers. Look at the neighborhoods for the post-merger carriers.

The new FedEx LTL division will be one of three super-regional carriers, along with independent USFreightways Corp. (USFC) and Con-Way Transportation Services, a part of CNF Inc. (CNF) All three cover the nation with regional less-than-truckload service, and are of similar size.

Down the street are the Big Four, the long-haul national players: Yellow Corp. (YELL), Roadway Express (ROAD), Consolidated Freightways (CFWY) and Arkansas Best Corp. (ABFS) Also, if reports are correct about Overnite Transportation, that its labor troubles with the Teamsters could soon end, that carrier — with backing from parent company Union Pacific (UNP) — would be in a position to move into a choice spot in the super-regional area. All of this makes for an exclusive and desirable, yet crowded, neighborhood.

As for the truckload guys . . .

There aren’t too many spreads near the Swift-M.S. Carriers Ponderosa. Schneider National, which does not publish much financial information because it is privately held, is still on top with about $3 billion a year in revenue.

Nearby is J.B. Hunt Transport Services (JBHT), with $2.2 billion a year in revenue, but with net income and market capitalization — or total share value — that is less than half of the size of the Swift-M.S. combination. This could make the new Swift a favorite for investors.

Wall Street analysts like the deal because it finally gives large, institutional investors a place to go within the truckload community. It is difficult, they say, to get a pension fund to invest a large amount of money in a small carrier.

With its nationwide geographical coverage, solid finances and a fleet of 10,000 tractors and 38,000 trailers, the post-merger Swift could come to define the truckload sector over the next few years.

Unless, of course, the deal so frightens other truckload carriers that it launches a wave of mega-mergers that would include the likes of Schneider, Hunt, Landstar System Inc. (LSTR) or the other three companies involved in Transplace.com: Werner Enterprises (WERN), U.S. Xpress Enterprises (XPRSA) and Covenant Transport (CVTI).

Anyone for J.B. Schneider or Hunt National?

Let the truckload merger games of 2001 begin.

Jonathan Reiskin covers financial issues in trucking for Transport Topics.