By acquiring Panther Expedited Services, a $215 million non-asset trucking and logistics operator, holding company Arkansas Best is reaching beyond its core less-than-truckload market to pursue what it sees as a “rapidly evolving” shipper.
The company will spend $180 million, including $80 million in cash, to purchase a carrier radically different from its primary transportation subsidiary, ABF Freight System, the sixth-largest LTL company in North America.
The Panther acquisition, one of the largest buyouts this year in trucking, is a big gambit for a company that recovered from two years of losses in 2011 only to slide back into the red in the first quarter of 2012 with a net loss of $18.2 million.
The purchase of a non-union company also could become a stumbling block in upcoming negotiations with the Teamsters union for a new contract at ABF Freight, especially because ABF is expected to seek some wage or benefit concessions.
But with the LTL landscape shifting in the wake of the worst recession in decades and tilting toward lower-cost and, in many cases, more diversified operators, ABF obviously decided it couldn’t wait. “Traditional solutions are no longer sufficient” to meet shipper needs, Arkansas Best President and CEO Judy R. McReynolds said in a June 14 conference call.
Customers, she said, are evolving beyond ABF’s traditional LTL reach. “They are no longer a manufacturer shipping an LTL-size shipment from their U.S. manufacturing site to a U.S. customer,” McReynolds told investment analysts. “Today’s typical LTL shipper is now assembling and sourcing product from overseas. It needs to be transported from Asia to a West Coast port and it needs to be distributed in truckload quantities from the West Coast port city. It needs to be warehoused in various parts of the country. And in some cases, it needs it to be distributed in a timely and expedited manner to the delivery point.”
Arkansas Best’s growth strategy, McReynolds said, focuses on becoming a diversified, one-stop logistics and transportation source for shippers. “Customers demand more than specialization in one piece of the supply chain,” she said.
Panther gives Arkansas Best an entry into expedited trucking, including loads requiring specialized equipment, ocean and air freight forwarding, truckload brokerage and third-party transportation management. “It makes the larger $700 billion overall transportation market more accessible to us, compared with the $34 billion LTL market,” McReynolds said. “That’s a compellingly larger pie.”
The trick, observers say, is to not lose touch with that core LTL market, which provided 91 percent of Arkansas Best’s $1.9 billion in 2011 revenue. McReynolds’ reference to becoming a “one-stop shop” stirs memories of YRC Worldwide’s ill-fated attempt to transform itself into a global supply chain services company. After suffering billions of dollars in losses, YRC now focuses solely on LTL trucking, under new management and the stewardship of its banking partners.
McReynolds said Arkansas Best wouldn’t take its eyes off ABF, which lost $59.7 million in 2010 and $170.3 million in the recession year of 2009. ABF returned to profitability in the second quarter of 2011 and posted a $3.6 million profit for the year, before losing $18.2 million in the last quarter.
“We know we have a cost issue with ABF and we’ve got to address that. But at the same time, we want to be a premium service provider with our customers,” McReynolds said. “ABF Freight President Roy Slagle and his team remain keenly focused on rightsizing ABF’s cost structure and improving ABF’s operating results.”
While recognizing the need to return “our core LTL business to sustained profitability,” she said Arkansas Best must explore “new profit opportunities” to reach its overall goals. That exploration was delayed for nearly four years by the recession and the rocky recovery at ABF, which has some of the highest operating ratios in the LTL industry, especially compared with non-union competitors.
The holding company began planning to diversify in 2008, McReynolds said. “Panther specifically has been under evaluation for several years. In fact, ABF has been a customer of Panther’s ground expedited product since 2006,” she said.
Panther’s management team, led by President Andy Clarke, its non-asset business model and its scalable information technology attracted Arkansas Best to the company. Importantly, Panther and ABF offer what McReynolds called “complementary,” not competing, services — a lesson Arkansas Best learned the hard way two decades ago when it acquired LTL carrier Carolina Freight.
“Both companies have expedited transportation solutions, but with different operating models,” she said. ABF’s expedited service runs through its 275-terminal, employee-driven LTL network. Panther utilizes more than 1,000 independent owner-operators, forwarders and other agents to move freight directly to customers. There is very little key customer overlap between the companies,” McReynolds said.
And although she said there would be some back office “synergies” between Panther and ABF, they’re not crucial to the deal.
What will be critical, she said, are cross-selling opportunities between ABF’s 58,000 shippers and Panther’s 11,000 customers. “The revenue opportunity is bidirectional,” McReynolds said. For ABF, it extends from on-demand expedited trucking within North America to refrigerated ocean and air transport.
“A substantial portion of the ABF customer base needs both truckload services and expedited services,” she said. “Those are two needs we’re meeting with this acquisition.”