Arkansas Best Spurns YRC Purchase Bid, Reaches Labor Pact

This story appears in the May 13 print edition of Transport Topics.

Arkansas Best Corp., fresh from winning a tentative contract with the Teamsters union for its less-than-truckload unit, last week said that it rebuffed an acquisition overture from competitor YRC Worldwide Inc.

Arkansas Best made the announcement about YRC’s late-March proposal May 8, five days after reaching a deal covering 7,500 Teamsters at the ABF Freight System unit.

A day later, YRC said it is still interested in an acquisition. Its statement confirmed the initiative, which included a meeting between CEOs James Welch of YRC and Judy McReynolds of ABF.

“Our board and management believed then and believes now that the combination of Arkansas Best and YRCW would be in the best interests of all employees, customers and shareholders of both companies,” Welch said in a statement. “We remain committed to continuing the great strides we have made at YRCW.”

An Arkansas Best statement said it “was not appropriate” to consider a combination at the time because of ongoing labor talks, as well as “other strategic and operational initiatives.”

The talks produced an agreement on May 3 that is followed by a two-step ratification process. The first step is approval by local union leaders affected by the pact, followed by rank-and-file voting. No schedule for either vote has been announced.

No further acquisition details were disclosed by either company in announcements made public seven weeks after the executives met.

Welch told Transport Topics that the main reason for the initiative was to increase freight density, leading to improved profits.

The YRC and ABF network locations are nearly identical, Welch said, with the potential to add about 17,500 daily ABF shipments to the current 45,000 handled by YRC Freight.

“It’s a way to attack a challenge we both share,” he said.

Asked how YRC could afford an acquisition when it has $1.3 billion in long-term debt, Welch said the company has made “tremendous progress” in the past 18 months, leading to increased confidence in the investment community.

“We are confident we would have the lenders’ support,” he said, adding that terminal operations could be consolidated and excess facilities could be sold to help defray the cost.

Kathy Fieweger, a spokeswoman for Arkansas Best, said the company would not comment beyond its regulatory filing. Union spokesman Galen Munroe said the Teamsters also had no comment.

Arkansas Best’s filing said the disclosure was made “in response to a third-party inquiry,” without identifying that party.

Because neither side offered contract details, it wasn’t known how much of a reduction ABF’s union workers were being asked to take.

Analysts believe ABF’s deal will lower wage expense, in line with the company’s goal of reducing those expenses, which are the industry’s highest.

“We have built a 10% labor-cost reduction into our models to this point,” said stock analyst Sal Vitale in a note to clients of Sterne, Agee & Leach. Vitale said that if his model holds up, it will reduce operating ratio — expenses as a percentage of revenue — to 98, making for a small profit rather than a loss.

Jason Seidl, an analyst for Cowen Securities, told Transport Topics the company was seeking a 6.5% wage reduction and that he believed the final contract would contain a pay reduction smaller than that amount.

YRC’s Teamsters are working under the terms of a 15% pay cut granted in exchange for stock ownership. Three years ago, ABF rank and file rejected a 15% pay cut agreed to by union leaders.

Fort Smith, Ark.-based ABF said the proposed agreement would “maintain the best-paying jobs in the freight industry,” “stay in our current pension fund,” “adapt to the changing needs of our customers,” and “put ABF on a path of profitability.”

For the 12 months ended March 31, the ABF division of Arkansas Best had an operating loss of $20.1 million on revenue of $1.74 billion, producing an operating ratio of 101.2. That compares with a profit of $4.69 million on revenue of $1.73 billion for the 12 months ended March 31, 2012.

Over the 12-month period ended March 31, YRC’s operating loss totaled $14.8 million from $4.7 billion in revenue, but YRC has posted three straight profitable operating quarters.

The YRC operating profit and Arkansas Best’s contract announcement sparked stock price increases of 82% at YRC and 40% at ABF.

The current ABF five-year pact originally ran through March 31, but it has been extended twice — most recently through the end of May.

Seidl said that successfully combining the YRC and ABF networks would be extremely difficult, given past failures when LTL carriers tried that approach.

Seidl also questioned YRC’s timing, saying, “You might want to have a few more profitable quarters under your belt before making a move like that.”

Acquisitions have been a part of the strategy at YRC and its predecessors for two decades.

Arkansas Best last year began to diversify away from its LTL core by purchasing Panther Expedited.