UPS (NYSE: UPS) agreed to sell its freight division to TFI International (NYSE: TFII) for $ 800 million in the second quarter of 2021. While investors in both companies applauded the development, TFI International’s shares reacted more strongly and rose double-digit percentages at the time of writing, signaling the thumbs of Canadian transport company and logistics company shareholders.
For UPS, it is the first major change since CEO Carol Tome revealed her intentions to rationalize the company after taking over in June 2020.
Here’s why UPS is selling UPS Freight
UPS operates three broad segments: domestic package in the United States, international package and supply and freight chain. UPS Freight is part of the flexible chain and freight segment, which also includes forwarding and logistics. UPS Freight, which offers regional, interregional and lower-load services, generated $ 3.3 billion in revenue in 2019. It accounted for about 4.4% of UPS’s total revenue for the year.
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The move to sell UPS Freight is in line with “the company’s ‘best, not greatest’ strategic positioning,” the press release said. In other words, it is in line with what Tomé said during UPS’s second quarter earnings conference call held in July 2020: “We will focus on creating value for our shareholders, with the aim of increasing interest rates. return on capital we invest. It is all about becoming better, not bigger.
It seems to be a good move, if UPS Freight’s recent operational performance is any indication. Consider that during the nine months ending in September 2020, UPS Freight’s revenue fell 5.1% year-over-year, even with forwarding and logistics reporting a growth of 11.7% and 14% in revenue, respectively.
Financial impact on UPS and TFI
UPS Freight fits well with TFI’s aggressive efforts to expand in North America. It is also a debt-free business and is expected to add 197 facilities with about 6 million square feet of floor space to TFI’s portfolio. As UPS Freight was close to breaking even on an operating profit basis, TFI expects the business to increase its earnings in 2021.
UPS, however, may incur a $ 500 million pre-tax loss charge on the sale, which should be reflected in its 2020 figures for the entire year. Eventually, UPS expects the divestment to increase its overall operating margin and help reduce debt.