YRC Worldwide was — and still is — interested in acquiring not just rival trucker ABF Freight System but its $2.1 billion parent company Arkansas Best, which includes Panther Expedited Services, YRC Worldwide CEO James Welch said.
The drive to build density in freight and lanes — and increase profitability — is the key to YRC Worldwide’s interest in its smaller rival, Welch said. “If you look at where both companies are today and how density plays such a huge role in determining the success of these operations, both ABF and YRC Freight could use more density in their networks,” he said in an interview.
By merging ABF's and YRC Freight’s nationwide terminal networks to achieve greater freight density, “we would create a much more financially secure company, with a more secure future,” Welch said. “It would give us an opportunity to have a more profitable company. It would be good for employees and shareholders.”
YRC Freight’s 295 terminals and ABF’s 277 service centers are “nearly on top of one another,” Welch said. “Virtually, they’re the same network. When you think about the density of one full truck going from Dallas to Amarillo versus two partially full trucks, that’s what I’m talking about. You’re eliminating miles and equipment.”
News of the prospective deal — rejected by Arkansas Best in April — surprised the trucking industry and investment community, with one analyst telling Bloomberg Business Week "it just doesn't make any sense." Both companies are losing money, though YRC Worldwide is turning an operating profit, improving pricing and freight mix. Where would the money for an acquisition come from?
The sale of duplicative equipment and property could be used to finance some of the acquisition without the need to raise billions of dollars and pile an even heavier load of debt onto the already substantial pile owned by YRC Worldwide, Welch said. YRC Worldwide had about $1.3 billion in long-term debt at the end of the first quarter. The combined companies would be more attractive to investors, he said.
“We could recapitalize the whole business, sell excess equipment, upgrade our talent and put it all together to make one really excellent company,” said Welch.
But it was not to be. Arkansas Best rejected what YRC Worldwide called “a preliminary proposal” in early April, according to a document filed by the company with the U.S. Securities and Exchange Commission on May 9. The previous day, logistics magazine DC Velocity reported YRC’s Welch had approached Arkansas Best about acquiring its LTL carrier in March.
“ABC advised YRC that ABF was highly focused on its ongoing labor negotiations as well as other strategic and operational initiatives and that considering a transaction with YRC was not appropriate at that time,” Arkansas Best said in its SEC statement. The company said it hasn’t engaged in any further discussions with YRC Worldwide.
YRC Worldwide's offer to at least talk about acquiring Arkansas Best is just the latest twist in the complicated relationship between the two companies. YRC and ABC are the only two major trucking operators left in the Teamsters union's National Master Freight Agreement, and ABF is suing the Teamsters and YRC subsidiaries over wage and benefit concessions granted to YRC that ABF claims are illegal.
Those wage concessions, which helped save YRC Worldwide from bankruptcy in 2009, put ABF in a less competitive position, with substantially higher wages and benefit contributions than YRC companies. The company tried to remedy that by negotiating its own concession package with the Teamsters, but its 7,500 union employees rejected that package in 2010.
After months of often acrimonious talks on a new multi-year contract, ABF and the Teamsters reached a tentative agreement May 3 that must now be approved by ABF Teamsters.
This isn't the first time a YRC-ABF combination has been discussed. The Teamsters union at one point pressured ABF to buy then weaker YRC, according to information ABF published in 2010.
Welch still thinks a transaction bringing together the largest and third-largest Teamsters-organized trucking operators would be a good idea for both companies. "There are lot of things we like between their mix of business and our mix of business," he said. "ABF has a unique model for handling freight that is a little more difficult to handle and they do a really good job at it. They don't play as heavily in the 3PL or corporate channel as we do."
On paper, a merger of the two companies would create a $7 billion transportation holding company, the largest industrial trucking operation in the U.S. That would reshape the upper tier of the LTL market, now dominated by FedEx Freight, Con-way Freight and YRC Freight, and likely give a boost to industry-wide LTL pricing Welch recently said is 10 to 15 percent lower than it should be.
The combined annual revenue of ABF and YRC Freight, YRC’s national less-than-truckload subsidiary, would top $4.9 billion — the current annual revenue of YRC Worldwide. But the goal would be to combine ABF and YRC to get better density in a leaner network, which would entail closing many facilities and selling off property to fund the acquisition.
Such a merger would likely land hard on ABF’s 9,900 employees, many of them Teamsters. A YRC-ABF consolidation would likely be very painful and difficult, though Welch insists it would be easier than merging Yellow and Roadway.
"When those companies were put together they were running in excess of 50,000 shipments a day each and they were strugglilng. Today, YRC Freight is running about 45,000 shipments a day and ABF about 17,000," he said.
“We think taking two good companies and making a more valuable, profitable single company is good for employees over time,” Welch said. “There would be some job loss at first, but having one strong company would give the company a better chance to grow in the marketplace. Over time, it would be better for employees.”
The revelation that YRC Worldwide, which has suffered more than $3 billion in losses since 2006, including a $136.5 million net loss in 2012, would even consider acquiring Arkansas Best is also a sign of how far the company has come on the road to recovery since its latest reorganization in 2011 and the appointment of Welch as CEO.
“We’re making solid progress, and our company is now in a position to make more progressive moves,” Welch said. “It’s all about regaining a leading position in the North American LTL market. We’re not sitting idly by hoping things will get better. We’re doing a lot of things hoping to move this company forward.”
Both companies' stock price moved forward after the revalations, with YRC Worldwide's stock rising 3.65 percent early May 10 and Arkansas Best's stock price up more than 8 percent from the previous close.