FedEx to Acquire Watkins Motor Lines
Acquisition to allow FedEx to provide more choices for heavyweight deliveries; Addition of long-haul LTL capability expands freight portfolio to meet customer demand
FedEx Corporation (NYSE: FDX) today announced an agreement to acquire the less-than-truckload (LTL) operations of Watkins Motor Lines and certain affiliates for $780 million, payable in cash. Heavyweight freight customers will benefit from the additional choice that this new, reliable and cost-effective solution will add to the FedEx Freight portfolio of services.
Watkins Motor Lines, a privately held company headquartered in Lakeland, Fla., is a leading provider of long-haul LTL services. With over $1 billion in annual revenue, Watkins will be rebranded FedEx National LTL and operate as a separate network within the FedEx Freight segment. The transaction is expected to close during the first quarter of fiscal 2007 and is subject to customary conditions, including government approvals. The acquisition is not expected to have a material effect on the fiscal 2007 financial results of FedEx.
As part of the transaction, FedEx has also agreed to acquire the assets of Watkins' business in Canada, Watkins Canada Express. Watkins Canada Express will be rebranded FedEx Freight Canada and will extend FedEx Freight's reach in the market and create opportunities for growth.
Strategic Investment
"This acquisition will extend our leadership position in the heavy freight sector and provide new growth opportunities for the business," said Frederick W. Smith, chairman, president and chief executive officer of FedEx Corp. "Our customers have increasingly asked us to provide a broader range of transportation and supply chain services, and as a result of this acquisition, we will be in a better position to meet their expectations."
"Since its formation in 2001, FedEx Freight has continued to grow and strengthen the financial returns of FedEx Corporation and its shareowners," said Alan B. Graf, Jr., executive vice president and chief financial officer. "We expect Watkins to follow in those footsteps. We believe that Watkins will achieve strong financial returns and be accretive to the long-term financial goals of the company."
FedEx Freight and Watkins have complementary service offerings. The addition of Watkins' three-day or more long-haul service to FedEx Freight's industry-leading next-day and second-day regional LTL service will extend FedEx's leadership position in the freight sector.
"FedEx changed the landscape in the freight industry by delivering time-sensitive LTL shipments with the reliability for which FedEx is known," said Douglas G. Duncan, president and chief executive officer of FedEx Freight. "This acquisition is an opportunity to do more business with our current shippers and to target new customers with a comprehensive LTL solution – allowing us to grow faster than the industry in which we operate."
Complementary Businesses
FedEx Freight and Watkins together will form the industry's most well-rounded LTL transportation solution, providing customers with an unmatched suite of solutions under one brand. The companies are also a strong cultural fit, sharing a commitment to their workforces that fosters dedication to delivering extraordinary value to customers. Both organizations have a dedicated, highly trained, flexible workforce that drives superior, on-time performance.
Watkins management will remain in place with Chip Watkins serving as president. He will report to Patrick L. Reed, executive vice president and chief operating officer of FedEx Freight, who has responsibility for all LTL operations in the United States.
Segment Leadership
FedEx has long recognized the value of reliable, LTL transportation to the global supply chain, creating FedEx Freight in 2001. Since its formation, FedEx Freight has grown to become the largest regional LTL provider in the United States.
FedEx Freight has raised the service level in the regional LTL sector, providing innovative customer solutions, enhanced information technology and value-added features such as a no-fee money-back guarantee and FedEx Freight Advance Notice(SM), a proprietary tool that proactively informs customers of the status of their shipments. With Watkins, FedEx Freight will extend its hallmark commitment to customer service and innovation to the long-haul LTL sector, building on Watkins' strong reputation for service and reliability.
Analysts and Media Information
A conference call for financial analysts and media will be held at 10:00 a.m. (EDT) on Tuesday, May 30, 2006, and will be Webcast at www.fedex.com/us/investorrelations. A replay of the conference call Webcast will be posted on the site following the call and will remain available for approximately one year.
For B-roll/video content about this FedEx acquisition, please log onto www.thenewsmarket.com/fedex to preview and request video. For editorial use only, print and online images may be downloaded from fedexnational.fedex.com.
About FedEx Freight
Within FedEx Corp., the FedEx Freight segment has annual revenues of $3.5 billion. The segment includes FedEx Freight, a leading U.S. provider of regional next-day and second-day and interregional LTL freight services. With corporate offices in Memphis, Tenn., FedEx Freight is known for exceptional service, reliability and on-time performance. Through a comprehensive network of service centers and advanced information systems, FedEx Freight provides service to virtually all U.S. ZIP codes, including Alaska and Hawaii. The carrier's regional and interregional LTL service is supported by a no-fee money-back guarantee on all eligible continental U.S. shipments. Internationally, the company serves Canada, Mexico, Puerto Rico, Central and South America, the Caribbean, Europe and Asia. FedEx Freight maintains more than 330 service centers throughout North America. The FedEx Freight segment also includes FedEx Custom Critical, North America's largest time-specific, critical shipment carrier; and Caribbean Transportation Services, the leading provider of airfreight forwarding services between the United States and Puerto Rico.
About FedEx Corp.
FedEx Corp. (NYSE: FDX) provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. With annual revenues of $32 billion, the company offers integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Consistently ranked among the world's most admired and trusted employers, FedEx inspires its more than 260,000 employees and contractors to remain "absolutely, positively" focused on safety, the highest ethical and professional standards and the needs of their customers and communities. For more information, visit www.fedex.com.
About Watkins
Founded in 1932, Watkins Motor Lines is a privately owned, nationwide LTL long-haul carrier and a subsidiary of Watkins Associated Industries. Known for its premium on-time service, the company has a workforce of approximately 10,000 and is one of a handful of trucking companies that has been consistently profitable since obtaining its transcontinental LTL operating authority in 1972. Today, with annual revenues in excess of $1 billion, it has 139 locations in 42 states and Puerto Rico and operates more than 3,400 late-model city and linehaul tractors and 10,200-plus trailers.
About the Transaction
J.P. Morgan Securities and Banc of America Securities advised FedEx on the transaction. Raymond James acted as financial advisor to Watkins.
Certain statements in this press release regarding the proposed transaction between FedEx and Watkins may be considered "forward-looking statements," such as statements relating to expectations for Watkins' business, whether and when the transaction will close and its impact on FedEx's financial results. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the receipt of regulatory approvals without unexpected delays or conditions, FedEx's ability to successfully operate Watkins without disruption to its other business activities, FedEx's ability to achieve the anticipated results from the acquisition of Watkins, the effects of competition (in particular the response to the transaction in the marketplace), economic conditions in the global markets in which we operate and other factors which can be found in the FedEx Corp.'s and its subsidiaries' press releases and filings with the SEC.
FedEx announces $780 million acquisition of Watkins Motor Lines
Associated Press DataStream FFF 05-26-2006
MEMPHIS, Tenn._FedEx Corp. announced on Friday a deal to acquire Watkins Motor Lines, a less-than-truckload carrier of general commodities, for $780 million in cash.
Watkins, a privately held company based in Lakeland, Fla., will be rebranded FedEx National LTL and operate as a separate network within the FedEx Freight division as part of the deal, which is expected to be complete by next year.
The Memphis-based package delivery company has also agreed to acquire the assets of Watkins' business in Canada, Watkins Canada Express, which will be rebranded FedEx Freight Canada.
"Since its foundation in 2001, FedEx Freight has continued to grow and strengthen the financial returns of FedEx Corp.," said Alan Graf Jr., executive vice president and chief financial officer.
"We expect Watkins to follow in those footsteps. We believe that Watkins will achieve strong financial returns."
Representatives with Watkins did not immediately return phone calls seeking comment about the deal on Friday.
Company officials say FedEx Freight and Watkins have complementary service offerings with the addition of Watkins' three-day or more long-haul service to FedEx Freight's next-day and second-day regional less-than-truckload service.
Founded in 1932, Watkins Motor Lines has a work force of about 10,000. It has 139 locations in 42 states and Puerto Rico and operates more than 3,400 late-model city and linehaul tractors and over 10,200 trailers.
FedEx company officials said they do not expect any work force reductions at either company as a result of the acquisition.
Earlier this month, FedEx announced a $214 million expansion its Indianapolis hub. The 18-year-old operation, next to the Indianapolis International Airport, is FedEx's second largest domestic hub behind its headquarters in Memphis.
Shares of FedEx fell 22 cents to $107.50 in late trading on the New York Stock Exchange. The stock has traded between $76.81 and $120.01 over the past year.
Comment from Bear Stears, 30 May
FedEx Corporation (FDX-$107.49-Outperform)
Few surprises as FDX announces intent to purchase Watkins
· FDX announces agreement to acquire Watkins. On Friday FDX announced an agreement to acquire privately held, long-haul, non-union Watkins Motor Lines for $780 million in cash.
· What is Watkins? Watkins is predominately (90%) a long-haul provider of non-union LTL services with an estimated $1.05B in trailing revenue. FedEx Freight is predominantly (88%) a regional LTL with roughly $3.7B in rev.
· What was announced? Deal is expected to close by August. FDX will re-brand Watkins as FedEx National LTL and run it as a separate network apart from its existing regional LTL business. Deal for all cash and no debt assumed. We believe FDX paid about 6.1x adjusted trailing 12 month EV/EBITDA for Watkins, at the mid-point of our previously estimated range. We see no regulatory hurdles.
· Acquisition accretive over time. We believe that that prior to integration costs or synergies the acquisition is about $0.09 accretive to annual EPS. However, mgmt. is making it clear that they will spend capital up-front to re-brand, improve systems and IT and increase capacity. Accordingly mgmt has guided to no material accretion for F07 and we are leaving our F07 $6.76 EPS estimate unchanged at this time. We suspect this will prove conservative and that the deal will be modestly accretive to F07 and more than $0.10/share accretive annually thereafter.
· What is impact to the LTL market? We expect little freight diversion or operating risk posed by the acquisition as FDX operates Watkins as a separate network. We expect FDX to re-brand it quickly and to greatly increase its growth rate. We suspect over time FDX will pose a competitive threat to the unionized long-haul carriers and to a lesser degree potentially to the more regional LTL carriers. We don’t expect another large LTL deal for some time.
· FDX also announced impending retirement of Dan Sullivan. FDX also announced on Friday that highly respected Ground CEO, Dan Sullivan would retire effective Jan.
INVESTMENT CONCLUSION: FDX was down 0.2% on Friday (vs. the S&P 500 up 0.6%) after announcing at about 1:30pm the acquisition of Watkins Motor Lines, a privately held LTL. FDX stock remains up 4.0% YTD (vs. UPS up 7.8% and the S&P 500 up 2.6%). We have retained our generally in-line F4Q:06 and F07 EPS estimates of $1.75 and $6.76 (vs. prior Consensus $1.77 and $6.74).
FDX is currently trading at 16.0x and 9.8x our forward twelve month rolling P/E and EV/EBITDA estimates. This compares to its 1, 3 and 5 year averages of 16.2x, 17.8x and 18.1x and 9.0x, 9.5x, and 9.3x. FDX is also currently trading at discounts of 23% and 7% to UPS on a P/E basis and EV/EBITDA basis (including off balance sheet operating leases). This compares to FDX' average 1, 3 and 5 year average P/E discounts to UPS of 16%, 20%, and 22% and its average 1, 3 and 5 year average EV/EBITDA discounts of 9%, 14%, and 18%.
We have received several calls from investors recently regarding FDX' recent relative stock weakness compared to UPS and the S&P 500 and we believe the major driver has been market concerns about inflation. FDX has and is viewed as having strong operating leverage that can create strong upside to earnings expectations when the economy is robust but can also work against FDX historically when the economy greatly slows. UPS is perceived generally as more defensive with less operating leverage. Thus generally FDX tends to outperform and over exaggerate the markets euphoria while under perform and over exaggerate the markets’ fears. UPS to some degree tends to trade with the opposite psychology. We suspect FDX, while remaining quite cyclical, is less cyclical than many investors believe as ground has become a larger part of its operating income and it has greatly reduced its Express asset intensity from past cycles. We believe the U.S. and global economy remains stronger in the near term than investors realize and that FDX is likely to continue to beat expectations in the near term. At 16x forward earnings we believe FDX remains fairly valued, with 10-15% potential upside in the near term. FDX remains rated Outperform.
