The First Big Transportation Deal of the Year: TFII’s purchase of UPS Freight

The new year has started with a bang with TFII's planned purchase of the LTL Freight division of UPS.  TFII is a large Canadian freight transportation conglomerate and it's deal is unique in some ways but not in others.

The challenge for many Canadian LTL carriers has been to establish a solid arrangement with a profitable, reliable US LTL partner so they can jointly secure lucrative cross-border freight. Since the United States population is ten times the size of Canada’s, historically it has been financially difficult for a Canadian LTL carrier to purchase a major US LTL partner. Besides the cost, an acquisition of this nature only makes sense if the Canadian carrier is prepared to compete in the U.S. domestic LTL market.

As a result, most Canadian LTL carriers that have been interested in cross-border LTL freight, have formed partnerships with or more U.S. carriers. These partnerships typically last for a few years until one of the following things happen. The U.S. carrier decides to buy a Canadian carrier or cartage company in one or more Canadian cities and enter the market under their own banner. Alternatively, the one partner becomes frustrated with the other partner due to a lack of sales production. The carriers then must seek other partners or another group of partners as replacements. This partnership arrangement has been prevalent for decades.

A Brief History of Canadian Purchases of U.S. LTL Carriers

Going back in history, there are a small number of Canadian carriers that have purchased U.S. based LTL carriers. In 1979, Maislin Transport, the largest trucking company in Canada, and the eighth largest in North America, bought 5 U.S. carriers, notably Gateway Transportation of Lacrosse, Pennsylvania and Quinn Freight Lines of Brockton, Mass. But the fortunes of those and three other subsidiaries ran up against high interest rates and the U.S. decision to deregulate the industry. Price cutting by competing firms, coupled with the impact of a recession, helped increase Maislin’s losses to more than $30 million (U.S.) in 1981 and 1982 combined. Despite a large loan guarantee from Canada’s federal government, Maislin was forced to close its doors in 1982.

During the period 2005 to 2012, Vitran Express, a Toronto-based LTL carrier purchased several small LTL carriers with a total network of 101 terminals in 34 U.S. states. At its peak, Vitran was the 12th largest LTL carrier in North America with $380 million in revenue. With losses of $34 million during the first six months of 2013, Vitran sold its U.S. LTL business to Matthew Maroun, son of Manuel "Matty" Moroun, owner of the Ambassador Bridge, and a key executive in a trucking empire that included Central Transport and Universal Truckload Services for a “bargain basement” price of $2 million.

As I reflect on other foreign companies that purchased LTL carriers in the United States, TNT Freightways, founded in 1984 by the Australian TNT group, comes to mind.  TNT Freightways was created through the purchase of Red Star, Dugan, Pilot Freight Lines, Holland Motor Express, Bestway, and Reddaway. This group of companies has also had a bit of a bumpy history and has gone through various name (i.e., USF Freightways) and organizational changes (i.e., closures). In other words, the track record of Canadian or foreign companies purchasing U.S. LTL carriers has been disappointing, if not terrible. Where does that leave us with the TFII purchase of UPS Freight?

The Pluses of the UPS Freight Deal

TFII is paying $800 million, or just 0.25 times 2020 revenue (of $3.1 billion), for UPS Freight, a large discount to its LTL peers, to buy a struggling and historically underperforming business. It should be noted that UPS paid $1.25 billion for Overnite Transportation in 2005. The deal instantly makes TFII a top 5 LTL company in North America. TFII is now a major player in the U.S. domestic LTL market. As stated in a recent Freightwaves report “If successful, this deal is likely to be a homerun for TFII given the margin of safety of the purchase price being covered by trucks and owned hubs.”

Although UPS is shedding LTL ownership, it is not exiting the segment. Under the terms of a “transition services agreement,” UPS will, for at least the next five years, resell a UPS Freight offering for TFII known as Ground Freight Pricing, where a grouping of parcels weighing more than 150 pounds and not requiring palletization moves through UPS’ parcel processing network but is priced as cheaper LTL shipments. UPS’ involvement with TFI won’t stop there. For the next three years, it will provide unspecified back-office support to the new operation. UPS will also retain all assets and liabilities relating to pension, retirement, and other benefits for the unit’s 14,500 former employees until the deal closes. These are big positives.

UBS analyst Tom Wadewitz pointed to rebounding industrial activity as supportive of his forecast for tonnage growth of 5% in 2021 along with price increases of 4% to 5%. The combination “should translate to strong margin expansion and growth.” He expects earnings to increase 30% for Old Dominion and Saia, with earnings before interest, taxes, depreciation and amortization up by a similar amount at XPO. Manufacturing and industrial activity, which can account for up to 85% of LTL tonnage for some carriers, continues to improve, according to recent data points.

The Manufacturing Purchasing Managers’ Index (PMI) increased 3.2 percentage points to 60.7% in December, the seventh straight month the index has been in expansion territory. An index reading above 50% indicates growth in the U.S. manufacturing sector. LTL demand has a high correlation to the PMI data, with volumes lagging the index by roughly three months.

TFII has experience in merging some of its LTL operations. While the UPS operation is of a totally different magnitude, this experience may be helpful.

Looming over the industry is the question of the future of YRCW, another large, troubled LTL carrier. Concerns with YRCW may encourage some TFII shippers to accept the rate increases that will be proposed.

The Minuses of the UPS Freight Deal

TFI is buying a company with a one percent margin. It is a unionized (Teamster) operation and it will have to deal with a collective bargaining agreement that expires in 2023. UPS Freight was positioned from the start as a loss leader. Low rates combined with labor costs that are 10% to 11% above the industry average placed it in a situation where it had an inability to command premium rates charged by some of its high-quality rivals.

TFII plans to increase rates, purge unprofitable business, and improve the operations of UPS Freight. Clearly these initiatives are critical to upgrading the margins of this business. The question is can TFII’s management team make this happen? The other question is whether customers will remain with the new venture or move to some of its well-run competitors?

The U.S. LTL business is not the same as its Canadian counterpart. TFII is facing some smart well-managed competitors who will pounce on missteps of the new entrant. As noted above, the history of foreign acquisitions of U.S. LTL carriers is not a good one. Shippers and carriers will be watching TFII to see if it will be able to make this acquisition successful.

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