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FedEx Freight, the less-than-truckload unit of FedEx, appears to be heading for some kind of divestment.
In an earnings call in the wake of its latest quarterly results, FedEx president and CEO Raj Subramaniam admitted that the future of the company’s best-performing unit was under review.
“Our management team and board of directors, along with outside advisers, are conducting an assessment of the role of FedEx Freight in our portfolio structure, and potential steps to further unlock sustainable shareholder value,” he said.
The review is expected to be completed by the end of the year.
Rival UPS sold its UPS Freight division (built on the acquisition of Overnite Transportation in 2005) to TFI International for $800m in 2021.
The benefits anticipated at the time of LTL acquisitions “are no longer a magnet”, said Satish Jindel, president of transport research firm SJ Consulting. At the time, the parcel business was B2B, which offered synergies with LTL traffic. But, as the B2C sector rose to dominate the parcel business, those synergies were no longer there – “now freight and parcel don’t bundle,” he said.
And the sale of UPS Freight had no negative impact on its parent, as quarterly results since the sale show, he added.
But Mr Jindel does not regard a sale of FedEx Freight as likely. No competitor in the market is large enough to take over the largest LTL player in the US, he explained, adding that such a move would also entail the shedding of a large number of terminals during integration.
Neither does he envisage venture capital players making a move for FedEx Freight.
“No private equity firm is willing to invest in asset-based companies that are that big,” he said. “Which venture capital firm would pay $50bn for FedEx Freight, and what would it do with it?”
A spin-off would unlock shareholder value, which is currently confined by the market cap of FedEx. The freight division has been FedEx’s top performer, showing operating margins of 20%+ over the past two years, whereas the ground and express units eked out margins of 11.8% and 2%, respectively, last year.
Mr Jindel, who had advised FedEx chief Fred Smith in 1997 to take over Caliber System (followed by subsequent acquisitions in the LTL arena to build the largest operator), urged him in 2021 to consider a spin-off of FedEx Freight.
He estimated at the time that FedEx Freight could be valued at $34bn – today, its valuation should be around $50bn, he said.
In an open letter to Mr Smith, Mr Jindel pointed to the spin-off of GXO from XPO Logistics the year before, noting that its stock price subsequently surged 44%, while the combined value of XPO/GXO stock climbed 34%, from $135 to $181.
“Investors would welcome another opportunity to invest in a pure-play LTL operator,” he said, noting that currently there were only two such operators in the US market, Saia and Old Dominion.
“There will be great appetite in the investment community,” he said. “LTL is going to be the best segment to be in for the next three years.”
Mr Subramaniam’s remarks about shareholder value suggest a spin-off might be the most likely outcome of the review. FedEx could keep the LTL division, but it would be a missed opportunity, commented Mr Jindel.