UPS acquires Menlo Worldwide Forwarding
Express parcel and logistics giant UPS is making another large acquisition in the international freight business with Tuesday's announced takeover of Menlo Worldwide Forwarding Inc., a subsidiary of CNF.
UPS will pay $150 million in cash and take on about $110 million in long-term debt for the Palo Alto-based forwarding and customs broker.
Menlo Worldwide Forwarding, which had $1.9 billion in worldwide gross revenues in 2003, will expand the forwarding, trade compliance and customs brokerage business of UPS, initially built after the acquisition of Fritz Cos. in 2001.
Together the two companies account for 21 percent of the international transportation management market among North American-based logistics providers, according to logistics outsourcing consultant Richard Armstrong.
“As a result of the acquisition, UPS will expand its global capabilities and add guaranteed heavy air freight services around the world, enabling customers to reach the global marketplace faster,” the company said. “This also means UPS will introduce new time-definite products such as overnight, two-day and deferred heavy air freight in North America.”
The deal marks another battle in the fierce global competition between UPS, FedEx, TPG and Deutsche Post to expand capabilities and transportation networks in an effort to become one-stop shops for logistics services. The move fills a hole in UPS suite of capabilities, especially as it tries to fend off competition in North America, where Deutsche Post recently acquired the ground network of Airborne Express and is rapidly expanding its DHL express and logistics brand.
Menlo Worldwide Forwarding’s services include heavy air freight forwarding services, ocean services and international trade management, including customs brokerage. The purchased activities includes Menlo Worldwide Forwarding’s air and ocean forwarding operations in more than 175 countries, its North American services and facilities, its operations hub in Dayton, Ohio, Menlo Worldwide Expedite! and Menlo Worldwide Trade Services.
Menlo Worldwide Logistics, Menlo Worldwide Technologies, Vector SCM or Con-Way Transportation Services are not part of the transaction and will continue to be owned and operated by CNF.
UPS said the acquisition allows it to expand its product portfolio for guaranteed heavy air freight. In its capacity as a freight forwarder, UPS Supply Chain Solutions moves some heavy freight for international customers, mostly between gateway airports, but the Menlo capability allows it to offer guaranteed, door-to-door delivery service and expand the time-definite products in North America for the first time, UPS spokeswoman Peggy Gardner said.
“This is something our customers need, especially with distance-based sourcing,” she said.
“I think the reason UPS Supply Chain Services wants Menlo is just to expand the customer base. It’s another segment of customers it is not serving now,” Armstrong agreed in an interview during the Council of Logistics Management conference in Philadelphia.
CNF’s motivation to sell the forwarding unit was mostly financial. Menlo Worldwide Forwarding, previously Emery Air Freight and then Emery Forwarding, had been a drag on corporate earnings for years. The company shut down its airline in 2001 under pressure from the Federal Aviation Administration for safety violations. In 2003, the forwarding unit lost $41 million. During the first half of this year, Forwarding posted a $9 million loss and was projected to break even by the end of the year, according to Menlo officials. By comparison Menlo Worldwide Logistics and Vector SCM, the joint automotive logistics venture with GM, had profits of about $20 million. By shedding the forwarding business, Menlo operations quickly become cash positive.
A big drain for Menlo Forwarding was its airport hub in Dayton, Ohio. The company invested heavily to build capacity there in the late 1990s right before the dot-com bubble burst and the aviation market went into a decline. Menlo had been looking to unload the Dayton hub or find a co-tenant without success.
If anyone can mitigate the problems at the hub it is UPS as it moves into heavier shipments, said a CNF source. “If we had to close it down we’d have to take a huge write off.”
Forwarding’s international and brokerage businesses were profitable, but the hub was an albatross for the company. “The question is whether UPS can unlock some value from the hub,” he said.
Asked if UPS plans to continue operating the Dayton hub or switch operations there to UPS’ main hub in Louisville, Ky., Gardner said she had no information on the status of the Dayton facility.
The sale of forwarding comes two days after Edward Feitzinger, senior vice president of sales and marketing, told a handful of journalists at a private dinner how Menlo Worldwide “wants to be a top global forwarder” and lead global third party logistics provider after working hard to change the image of Emery as a North American forwarder and expanding its warehouse and contract logistics operations in other parts of the world.
Feitzinger described the company as “a global freight forwarder that happens to have a domestic airfreight network.”
The sale of Menlo Forwarding doesn’t affect Menlo’s international strategy, Feitzinger told American Shipper Tuesday. Menlo Worldwide Logistics continues to expand its warehousing and logistics management services in Europe, Asia, Australia and Latin America, he said.
“Our growth internationally is outstripping any other sector,” he said.
But Armstrong, who heads Stoughton, Wis.-based Armstrong & Associates and publishes an annual Who’s Who in Logistics, said Menlo Worldwide Logistics is still very much focused on the United States.
“Most of its overseas operations had been funneled through Menlo Worldwide Forwarding,” he said.
Meanwhile, Menlo and Vector SCM have begun to operate in a more integrated fashion in some parts of the world to bring together a broader spectrum of expertise on logistics software, warehousing, transportation management and logistics network engineering, Feitzinger said.
Menlo officials also tried to cast the divestiture of Menlo Worldwide Forwarding as a positive development for Worldwide Logistics operations. Feitzinger and Robert Bianco, president of Menlo Worldwide Logistics, acknowledged the forwarding unit generated a lot of sales for Logistics, but that Menlo would be better off in the long-run as a large, independent provider of logistics services that is not perceived as steering business to an in-house transportation provider.
“Some customers wanted a neutral-based approach,” Bianco said.
“We think we can make up for that” business by using other forwarders in the market, Feitzinger added.
The sale of the forwarding unit moves Menlo Worldwide away from being a one-stop logistics shop and “positions us as a high-end systems integration, lead logistics management provider,” Bianco said.
The price to be paid by UPS will be less than the book value of Menlo Worldwide Forwarding. CNF said it would recognize an after-tax loss on the sale of about $260 million, subject to adjustments at closing. CNF also said it would reschedule its planned Oct. 18 third-quarter earnings announcement and will present results on the basis of continuing and discontinued operations.
UPS expects to complete the transaction during the fourth quarter. The transaction is subject to customary closing conditions. “The transaction is expected to be slightly accretive to earnings in 2005,” UPS said.
“The bigger story maybe is how long CNF survives on its own or whether it is picked up by somebody else,” Armstrong said. “By unloading Menlo, CNF makes itself an extremely attractive takeover target because of its tremendous North American concentration in transportation” and the fact that it will be very profitable.
CNF owns Con-Way Transportation Services a major less-than-truckload motor carrier and logistics provider in addition to Menlo Worldwide Logistics and Vector SCM.
In a conference call with investors, CNF officials did not rule out listening to good offers for the company.
Deutsche Post and Schenker, a large transportation and distribution company in Europe that is owned by German rail Deutsche Bahn, are prime candidates to buy CNF, Armstrong said. Deutsche Post needs transportation concentration in North America if it is going to be truly competitive in the United States against UPS and FedEx, he said, while Schenker is looking to expand its contract warehousing and distribution in the United States.
Schenker, which recently opened a parts distribution center in Indianapolis, has a token presence in the United States. The company is better represented in Canada, where it has forwarding and warehouse operations.
UPS could also be a potential bidder for CNF because it doesn’t have a national heavy ground operation comparably to FedEx Freight, Armstrong said.
CNF is a $5.1 billion management company of global supply chain services with businesses in regional trucking, air freight, ocean freight, customs brokerage, global logistics management and trailer manufacturing.