UPS (NYSE: UPS) agreed to purchase its cargo division TFI International (NYSE: TFII) at $ 800 million by the second quarter of 2021. Although investors in both companies welcomed the development, TFI International’s shares reacted more strongly and the double-digit percentage was higher at the time of this writing. and logistics company.
For UPS, it’s the first big step since CEO Carol Tome has revealed her intentions to streamline the company after she took charge in June 2020.
This is why UPS sells UPS cargo
UPS operates three broad segments: US domestic package, international package, and supply chain and freight. UPS Freight is part of the flexible chain and goods segment, which also includes forwarding and logistics. UPS Freight, which offers regional, interregional and less than trucking services, generated $ 3.3 billion in revenue in 2019. That was about 4.4% of UPS’s total revenue for the year.
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The move to sell UPS Freight joins ‘the’ better not bigger ‘strategic positioning of the company,’ reads the press release. In other words, it is in line with what Tome said during UPS’s second-quarter revenue conference call in July 2020: ‘We will have a laser focus on creating value for our shareholders, with the goal to increase the rates of return on capital. we invest. It’s all about getting better, not bigger. ‘
This seems to be a good move if UPS Freight’s recent operating performance is anything to go by. Recall that during the nine months ended September 2020, UPS freight revenue decreased by 5.1% compared to the year, even though shipping and logistics reported revenue growth of 11.7% and 14% respectively.
Financial impact on UPS and TFI
UPS Freight fits in well with TFI’s aggressive efforts to expand in North America. It is also a debt-free transaction and should add 197 facilities with approximately 6 million square meters of floor space to the TFI’s portfolio. Since UPS Freight could be almost equal on an operating profit basis, TFI expects the transaction in 2021 to be attractive to its earnings.
However, UPS could charge a $ 500 million impairment charge on sales, which should reflect in its full 2020 numbers. UPS ultimately expects the repulsion to increase its overall operating margin and help it reduce debt.