I must admit to doing a double take when I saw the news come across the wire services: LTL giant Yellow Corp. is buying one of its largest rivals, Roadway Corp. for $1.1 billion.
Clearly, less than a year after the shocking collapse of the third largest player in the market, Consolidated Freightways, and after two years of steady decline in the ranks of smaller carriers (numbers show a 25% thinning of the herd among Canadian carriers earning less than $1 million in annual revenues), the LTL market remains at over capacity and full of surprises.
While the combined enterprise, to be known as Yellow-Roadway Corporation, will create one of the largest transportation service providers in the world with combined revenues at almost $6 billion, it likely won’t do much to solve the capacity issue. In the foreseeable future there is to be no rationalization of the operations of the two companies, including Canada’s Reimer Express Lines, which is owned by Roadway. The only savings – $45-$125 million annually will come from combining "back office" administrative functions such as payroll.
What the merger might do is solidify pricing in this sector for a while as happened following the Consolidated Freightways bankruptcy. So shippers should expect a tougher time in keeping the lid on rate increases or at least a harder time in finding deals. In fact, as Sam Barone of consulting firm Transportation Partners International points out, this type of consolidation may be the only way for LTL carriers to push through the rate increases they’ve been desiring for years.
On the good news side for shippers, provided the integration goes smoothly, the combined enterprise may also have the guns to bring new services into the market. It may now have the resources to compete not only against other LTL carriers but also against the likes of global transportation powerhouses such as UPS, FedEx and DHL, which would introduce greater market choice in that arena.
The new power to be wielded by these two U.S. LTL giants could prove troublesome for the smaller Canadian-based carriers.
Although they’ve done remarkably well to date competing against their much larger U.S. counterparts, if this merger signals the start of more such activity in the U.S. LTL sector, Canadian carriers may find it difficult to keep up. They simply don’t have the access to the public markets necessary to fund mergers on such a scale. And yet such mergers may be necessary to keep up with the increasing focus Canadian shippers are placing on the U.S. market and beyond. They expect the carriers serving them to keep pace with their international aspirations. Reimer itself benefited greatly in this regard back when it was purchased by Roadway and now it has the added benefit of the Yellow network.
That’s not to say the deal doesn’t have its question marks. Both companies appear well run (Roadway just announced a 13 per cent increase in its second quarter revenues) but a deal of this magnitude has its risks:
Did Yellow offer too much? Its offer of $48 per share represents a 49 per cent premium for Roadway shares. Clearly Yellow saw more in Roadway than the market did but that’s not too surprising trucking stocks (with the exception of recent months) have been traditionally misunderstood and undervalued by investors.
Will Yellow-Roadway really be satisfied with $125 million in annual savings? That’s a drop in the bucket for an outfit earning $6 billion in annual revenues. If they attempt to integrate operations to drive productivity, what kind of trouble can they expect from their Teamsters unions? How much rationalization in terminals and routes served between the two giants should shippers expect five years down the road ?
Although not an issue in Canada, in the U.S. there is a 30 per cent overlap in the customer base. Does it make sense to continue to compete against each other on price, as promised? Or will there be an eventual closing in on rates? More importantly, how will shippers react will they get concerned about the ability of such a powerhouse to better control market rates and start shopping their business around?
Stay tuned. There’s plenty of questions remaining to be answered and probably a few more surprises along the way.
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