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FedEx explores divestiture of freight business
FedEx is conducting a strategic analysis of the company’s less-than-truckload segment and its relative value to the company, suggesting that FedEx Freight could be sold or spun off so that the company could focus on its parcel and logistics businesses.
“With the recent completion of the FY 2025 planning process, we are turning our focus to the next phase of our long-term shareholder value creation plans. As part of this work, our management team and board of directors, together with external advisors, are conducting an assessment of the role of FedEx Freight in our portfolio structure and potential steps to further unlock sustainable shareholder value,” CEO and President Raj Subramaniam said Tuesday on a call with analysts following the fourth-quarter earnings announcement. “We are committed to completing this review thoroughly and deliberately by the end of the calendar year.”
FedEx Freight is the corporation (NYSE: FDX) best-performing segment, with operating margins of 20% in each of the last two years, compared with margins of 11.8% for ground transportation and 2% for express transportation in 2023. During the fourth quarter, revenue operational revenue increased by $58 million as a focus on revenue quality and cost management overcame the low demand environment and generated higher yields.
FedEx Freight is the nation’s largest LTL carrier and is extremely efficient, with an 80% operating rate, second only to Old Dominion Freight Line (ODFL).
Satish Jindel, founder and president of package shipping consultancy ShipMatrix Inc., predicted in an interview that FedEx will spin off its Freight subsidiary.
The best option to maximize shareholder value is to create a separate company with FedEx Freight, the nation’s largest LTL carrier, and issue shares to existing investors, he argued.
“You’ll get a better return for shareholders with a spinoff to the public market, not a sale,” because the next largest carriers — ODFL and Saia — don’t need FedEx Freight and it’s too expensive for anyone else to buy, he said.
Jindel urged FedEx founder Fred Smith in an open letter nearly three years ago to make Freight a standalone company because — by his estimate — it had a market capitalization of $34 billion, compared with $61 billion. millions of dollars from the entire FedEx company.
FedEx Freight’s revenue has grown 16.5% since then to $9.1 billion, and its estimated valuation is now more than $50 billion, so a spinoff is even more justified now, Jindel insisted.
“No carrier is big enough to buy FedEx Freight,” he said, debunking speculation that XPO, another large LTL carrier, would bid for the FedEx unit. “And you can’t integrate two carriers” because the networks LTL are so asset intensive that there would be huge redundancy at the terminals.
“Public markets don’t have enough choices. This is why you have more people buying Saia, ODFL and XPO shares. The moment they have the option for a fourth carrier,” they will invest there, Jindel told FreightWaves.
Another major LTL provider is ABF Freight System, but its expansion into household goods movement and third-party logistics means that LTL currently represents less than half of its business.
Stifel analyst Bruce Chan also said a spinoff of Freight is the most likely outcome. “The division has quietly grown from a marginalized family to the most profitable division in the portfolio, and with peer valuations nearly double FedEx’s, such a move makes sense to us,” he wrote in a research paper.
Markets welcomed the prospect of a freight deal and better earnings numbers. FedEx’s share price rose about 14.5% to $293 in midday trading as of Tuesday’s close.
BMO Capital Markets analyst Fadi Chamoun said in a client note that FedEx stock could be valued at between $310 and $338 per share if Freight is divested during the current fiscal year, with the value reaching $408 per share in fiscal 2026 if a deal is made.
FedEx rival UPS (NYSE: UPS) sold its LTL unit in 2021 to Canadian trucking company TFI International.
In related news, FedEx is in the process of consolidating Express and Ground into an integrated air and ground operating network. Subramaniam said future segment results will be reported by FedEx Corp. FedEx Freight will now include FedEx Custom Critical, a premium service that was previously included in the Express organization.
(Correction: An earlier version of this story incorrectly inflated FedEx Freight’s revenues. They were $9.1 billion in the previous fiscal year, not $19 billion.)
Click here for more FreightWaves/American Shipper stories from Eric Kulisch.
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