FedEx Corp. said it will acquire the long-haul, less-than-truckload operations of privately held trucking company Watkins Motor Lines and certain affiliates for $780 million in cash.
“This is going to be hugely positive for our business,” Doug Duncan, chief executive of FedEx less-than-truckload (LTL) unit FedEx Freight said after the announcement. “Up to now, we have not had the cost-effective, long-haul (LTL) service that our customers have been asking for.”
FedEx has so far specialized in regional LTL services. “This will allow us to provide a total solution for (LTL) customers,” he added.
LTL operators consolidate smaller loads into a single truck.
The acquisition announcement was anticipated by analysts this week after local press reports indicated that FedEx was near to buying Watkins. Originally both companies declined comment on the reports.
The $780 million price tag was also within the $700 million to $900 million range expected by analysts.
The transaction is expected to close during the first quarter of fiscal 2007 and is not expected to have a material effect on the fiscal 2007 financial results of Memphis, Tennessee-based FedEx.
As part of the deal, FedEx has also agreed to acquire the assets of Watkins’ business in Canada, Watkins Canada Express.
FedEx said Watkins management will remain in place, with Chip Watkins serving as president.
Founded in 1932, Watkins has around 10,000 employees and had 2005 revenue of more than $1 billion. It has 139 locations in 42 states and Puerto Rico.
In a flurry of research notes, analysts said that if FedEx bought Watkins, it would fit neatly with FedEx Freight’s business. So far, FedEx has focused on a regional less-than-truckload (LTL) business model and analysts said the long-haul specialty of Watkins would provide depth to that business.
“We like the sound of this potential deal,” BB&T analysts John Barnes and Adam Thalhimer wrote earlier.
FedEx built up FedEx Freight through three trucking company acquisitions between 1998 and 2001. The unit has high margins ’ 11% in fiscal year 2005, compared with 8.4% for the whole group—and had revenue of $3.2 billion in 2005.
FedEx reported 2005 fiscal year revenue of $29.36 billion, up from $24.71 billion in fiscal year 2004.
The company’s main rival, Atlanta, Georgia-based United Parcel Service Inc. also joined the LTL market last August with the acquisition of Overnite, now UPS Freight, for around $1.25 billion.
In a May 26 research note Merrill Lynch analyst Ken Hoexter said, “We would view this (Watkins Motor) transaction positively if the purchase price is within historical ranges, as it would strategically expand FedEx Freight’s portfolio to include a long-haul LTL product.”
Analysts referred to FedEx’s good track record with LTL acquisitions. FedEx Freight’s Duncan said that the “workforce and culture of Waktins is close to” that of FedEx, which he said should ease integration of the two operators.
Duncan said FedEx had been in talks with Watkins for a year-and-a-half leading up to the deal.
He added that FedEx Freight will follow the pattern of its previous LTL acquisitions and introduce the absolute on-time service that is part and parcel of its package delivery service.
“We will introduce a degree of reliability to long-haul (LTL) that is not available today,” Duncan said. (Reuters)