Yellow + Roadway = ?

Yellow + Roadway = ?

of Yellow-Roadway deal

This is how the trucking world is: There are Roadway shippers and there are Yellow shippers, but not nearly as many shippers who use both carriers. Just like there are hockey fans and basketball fans, but very few rabid fans of both.

That's just the way it is in trucking, executives say. Roadway Express shippers stick with the Akron, Ohio, long-haul carrier because somewhere along the line a Roadway salesman gave a good price, offered an interesting deal or played a nice round of customer golf. Or perhaps the shipper sticks with Roadway because the Yellow Corp. sales guy irked him with a bad rate or a crummy deal or didn't play a friendly round of golf.

The new $6 billion "Yellow-Roadway Corp." is going to try to make Roadway shippers out of Yellow guys and gals and vice versa. Although Bill Zollars, chief executive of Yellow Corp., swears there will be no massive changes of Roadway's network immediately, nobody expects the new combination to retain 35,000 Teamsters, 715 terminals and duplicate sales forces of the two companies for long after the $966 million deal is closed, probably late this year.

Another big question is how much of that $6 billion freight the combined operation eventually keeps. Rival trucking executives were palpably excited at the prospect of a Yellow-Roadway combination, almost as if much of that $6 billion in freight is freshly up for grabs. "It's a new day, my friend!" one transportation executive exulted.

Even some Roadway sales personnel must feel that way. Within 24 hours of the deal's announcement, one large carrier's national sales director reported getting calls from more than a few Roadway salesmen inquiring about positions with the carrier.

Not everyone, however, is convinced that much Yellow and Roadway business is actually up for grabs. But one major competitor said that no matter how much Wall Street may like this deal, the key is customer acceptance.

Seventy percent of the business of Yellow and Roadway comes from some 1,800 large, national accounts. It's because of these purveyors of millions of tons of freight that the large national less-than-truckload carriers keep national sales executives. It's the reason for all the golf invitations, goodie bags and other perks that large shippers get from carriers coveting all that freight.

Douglas G. Duncan, president and chief executive of FedEx Freight, which had revenue of $2 billion last year, would not speculate on how Yellow-Roadway customers will react. "I'm not an expert in long-haul pricing," he said. "I'm not in that market. I think time will tell what the customer reaction will be. That's the piece of the puzzle that is missed. The person paying the bill is the customer. That's who is going to determine whether this is successful or not."

The Yellow-Roadway deal is incredibly pricey, making instant millionaires of large Roadway shareholders, who are getting a 50 percent premium for the $48-per-share acquisition. The debt associated with Yellow Corp.'s $1.1 billion acquisition, including Roadway debt, caused Standard & Poor's rating service to downgrade Yellow Corp.'s credit rating while placing the company on its credit watch with "negative" implications.

Many of the Teamsters rank and file at the carriers are leery of layoffs. Teamsters President James P. Hoffa said he still has lots of unanswered questions after meeting with Zollars and Jim Staley, Roadway's chief executive, two days after the July 8 merger was proposed.

"The proposed merger raises many questions," Hoffa said. "The job security of our members is at stake. We intend to thoroughly review the proposal to ensure that the financial integrity of both companies remains strong and the job security of their workers is protected."

Hoffa pointed out the proposed merger potentially affects more than 35,000 Teamsters members - about half the remaining Teamsters' work force in the freight industry. That is down from more than 500,000 Teamsters in the freight sector prior to the Motor Carrier Act of 1980, which deregulated trucking.

The union is analyzing the proposal and the crossover business that both companies share. Yellow's Zollars said only about 30 percent of its shippers also use Roadway.

"Sure, we both carry retailers," said Staley, who will stay on as Roadway's top executive after the merger closes in the fourth quarter. "But we're strong with Home Depot; they're strong with Lowe's. They're strong with Wal-Mart; we're not."

But that does not reassure large shippers who are concerned that soon there might be one less option for long-haul freight. John Gentle, global transportation leader of carrier relations for Owens Corning, Toledo, Ohio, said he's "very concerned" about the possibility of reduced service options.

"Certainly the thing that concerns us is the issue of the limitations that would impact service, price and capacity," Gentle said. "It's a nationwide issue. If this does hold up, what we're going to see is another round of consolidation. I can only imagine what's going on with ABF and other suitors."

ABF Freight System, which had $1.3 billion in revenue last year, once only slightly trailed Consolidated Freightways Corp. as the fourth member of what was trucking's "Big Four" LTL carriers. Now Fort Smith, Ark.-based ABF is a distant No. 2 - behind Yellow-Roadway Corp. - among unionized long-haul carriers. United Parcel Service, which does about one-tenth of its $32 billion-a-year revenue in the LTL sector, often has been mentioned as a possible buyer of an established LTL carrier, although UPS officials would not speculate on any possible purchase.

Still, few shippers expect Yellow-Roadway Corp. to long operate two terminals - one Yellow, one Roadway - directly across the street from each other, as is often the case now. The combined Yellow-Roadway Corp. has more than 600 terminals, about the size of each of Yellow, Roadway and CF's networks in the early 1990s before all three downsized significantly.

There is a probably a snowball's chance in hell that Washington will nix the deal on antitrust grounds. Few are counting on it. It's theoretically possible that Yellow-Roadway Corp. might draw the scrutiny of the Federal Trade Commission or the Justice Department, despite the Bush administration's reluctance to interfere in most mergers.

If the relevant market is defined narrowly, including only national long-haul LTL carriers, the proposed transaction could be viewed as dramatically increasing concentration in an already highly concentrated market by combining the two largest competitors and reducing the number of independent competitors from as few as three to two.

If the relevant market is defined more broadly, however, including competition from regional LTL carriers, truckload carriers and parcel carriers including FedEx and UPS, the competitive impact of the proposed transaction could be viewed as more benign.

No matter how the shakeout from Yellow-Roadway Corp. turns out, few shippers expect this to be the end of the decades-long consolidation in the long-haul industry.

"I would think there certainly would be other reactions," Gentle said. "You can't be prophetic, but one would think it would be more."