Wow! This ought to !
Here's a few excerpts from the story...
- Substantial expansion of a regional and line-haul network. This would include the addition of direct terminals in Alaska, Hawaii, Puerto Rico as well as Canada and Mexico. Additionally, YRC Worldwide already includes four separate operating entities, UPS could keep the holding company structure and include UPS LTL as the fifth company. Owning such a robust network would allow for consolidation and optimization of network terminals to be efficiently utilized by all operating companies.
- Another major benefit would be cost. UPS would most likely be able to purchase YRC Worldwide at or below $1.5 billion. At the most, the price would be very similar to the Coyote purchase price of $1.8 billion. Based on UPS's cash on-hand and leverage, a deal would have a very minimal impact on the balance sheet. However, UPS would gain a company with nearly $5 billion in revenue, combined with substantial revenue equipment and improved facilities including significant technology investments. XPO paid nearly double for Con-way at $3 billion, UPS would be getting a substantially discounted price based on any perceived risks; consolidating YRC Worldwide's debt would eliminate one of these risks.
- E-commerce and cross-selling growth. The LTL market continues to support many large e-commerce companies as well as industrial and retail shippers. YRC Worldwide would add a formidable customer list to UPS existing customers. Becoming the number one LTL carrier with five distinct service offerings throughout North America in combination with Coyote would generate a large increase in cross-selling opportunities, and potentially increase organic growth for Coyote.
- Competitive differentiation versus FedEx. UPS would have a unique and diversified leading LTL service which would give the company more consideration from existing and future customers requiring LTL and asset-light services, as well as those using air freight and package delivery services. UPS could pursue stronger marketing to more aggressively challenge FedEx's market share.
- Improved yield management. UPS would potentially control 30 to 35 percent of the LTL market which would improve the company's pricing capabilities. Combined with operating cost savings from network combinations, UPS could possibly witness margin expansion and greater profitability.
- Adequate capacity for near-term tightening issues. UPS would have the most extensive network as near-term federal regulations are approaching which would place the company in a strong position to fulfill customer needs, once supply has been diminished. Unionized labor contracts are in place through March 2019.
For a price between $1.5 and $1.8 billion, UPS would be paying less than 4 times adjusted EBITDA, assuming that YRC Worldwide were to add another $100 million on to the existing roughly $340 million. The current outstanding nearly $1 billion in debt for YRC Worldwide would add 6 percent to UPS's existing $15.4 billion in debt. UPS would still have around $4.5 billion in cash and cash equivalents left over after the deal.
Over time, YRC Worldwide could potentially add around $5 billion in revenue, $100 million in net cash flow and somewhere around $0.10-0.15 per share. This does not sound like much compared to UPS's overall operations from an accretive perspective, but for the LTL and asset-light services, this could double operating income and substantially improve margins.
Based upon UPS's cash position, cash flow generation and leverage, YRC Worldwide's perceived leverage risk would not be as prevalent if combined with UPS. YRC Worldwide's unionized labor would add further risk associated with pension, wage and other benefit renegotiation, but UPS has strong experience in dealing with unionized labor.
Any proposed merger would be scrutinized by the Federal Trade Commission, FTC and Department of Justice (DOJ). The Hart-Scott-Rodino Act, HSR Act, established the Federal premerger notification program, which provides the FTC and DOJ with information about large mergers and acquisitions before they occur. A deal is not allowed to be closed until the waiting period outlined in the HSR Act has passed, or the government has granted early termination of the waiting period.
The LTL market would still have alternative competitors, most notably FedEx, which would still have a market share of around 25 percent. A merger between UPS and YRC Worldwide would not seem to result in a monopolizing effect for the LTL industry with only 30 to 35 percent market share.
Overall, possible benefits versus cost of a deal seem advantageous for UPS. While only speculative, it would make sense for UPS to let YRC Worldwide display further execution of the company's strategies over the next couple of quarters. But taking this chance could result in YRC Worldwide's stock price increasing higher from today's $9/share. The good thing is the company is so discounted with so few shares outstanding that even an increase to $25/share would only result in an EV of $1.7 billion.
Let me be clear with this final thought, this is not a recommendation to make a decision based upon speculative merger potential. As always investors should perform their due diligence and come to their own conclusions based upon their investment objectives and risk tolerances. But I do believe this deal would benefit UPS and I would not be surprised if a deal were to occur later this year.
Read the full story here...