16 December 1998

Yellow and CF Stocks in Heavy Trading as Merger Rumors Fly

The following article is excerpted from "The Journal of Commerce" issue of 16 December 1998.

Rumors of a possible merger between two of the nation's [ie the United States] largest trucking companies — Yellow Corp. and Consolidated Freightways Corp. — has prompted heavy trading in both company's stocks.

If such a merger were to take place, it would create the second-largest trucking company in the world behind United Parcel Service, and could speed consolidation in their key trucking sector.

Both carriers consolidate pallet-size shipments of freight through a series of terminals, a labor-intensive practice known as less-than-truckload. Both also have their hourly employees represented by the Teamsters union and are facing increased competition from nonunion carriers.

Investors are apparently betting that a merger would be able to realize savings from increased density in its trucks and terminals as well as from significant job cuts in Yellow's 29,000-person and CF's 22,000-person work forces.

"It's a very interesting idea. You've got to love the concept," said Douglas Rockel, an analyst at ING Baring Furman Selz in New York.

The history of trucking mergers in the country has generally not been a positive one, with losses and service problems often the result of such consolidations. But Mr. Rockel said this one, if it were to happen, might be different since both companies are now posting positive, though narrow, operating incomes.

CF is the nation's third-largest LTL carrier, had net income of $23.7 million in the first nine months of the year, an increase of 8% over the same period of 1997 despite help it got from a UPS strike in August 1997.

Its revenue of $1.7 billion and its operating income $47.7 million were slightly lower than the year-earlier period due to the impact of that strike.

CF's ratio of operating expenses to operating revenue, a key measure of a carrier's profitability, was 97.1%, unchanged from the year-earlier period.

Yellow Corp., operates Yellow Freight System Inc., the nation's second-largest LTL carrier after Roadway Express Inc. It also owns several regional, nonunion LTL carriers.

In the first nine months of this year the holding company posted a $37.1million loss due to the costs of selling a unionized regional carrier, Preston Trucking Co., earlier in the year.

But net income from continuing operations was $29.6 million. Revenue was $2.2 billion, and its operating ratio on continuing operations rose slightly to 97.2% from 96.3% in the year-earlier period.

"These are the best of times for trucking and these companies are not earning an adequate rate of return," Mr. Rockel said. "The answer is density."

Officials of the two companies did not return phone calls seeking comment on the activity in their stock or the rumors....

The threatened loss of thousands of Teamsters jobs would be the first challenge facing President-elect James P. Hoffa, son of the former president who was elected earlier this month after a bitter election battle that stretched three years. Union officials were not available for comment Tuesday afternoon.