Blockbuster M&A Deep Dive: TFI International buys UPS Freight

This week a blockbuster M&A deal was announced in which TFI International (TFII) will be buying UPS Freight (UPSF) for $800 million in a debt-free transaction using cash on hand and liquidity. TFII is paying just 0.25 times 2020 revenue for UPS Freight, a large discount to its LTL peers, to buy a struggling and  historically underperforming business. The deal instantly makes TFII a top 5 LTL company in North America.

TFII has been led by the same CEO in Alain Bedard since 1996 and has been built up into its current form by being a serial acquirer of underperforming or neglected transportation and logistics assets. TFII has made more than 90 acquisitions since 2008; however, many have been smaller bolt-on acquisitions, and UPS Freight is by far the company’s biggest strategic bet ever. UPS Freight will nearly double the size of the company’s top line (adding 70% to pre-deal revenue) and will massively increase TFII’s fleet count, employee base and LTL hub network. Post-transaction, LTL will compose 44% of TFII’s revenue (vs. 15% prior).

TFII aims to turn the business around by repricing unprofitable business as well as streamlining operations and cutting costs to decrease its operating ratio (OR) to 90% three years from now (compared to 99% today). If successful, this deal is likely to be a homerun for TFII given the margin of safety of the purchase price being covered by trucks and owned hubs. Unionization is a wild card and could represent a risk, but the transaction fills in gaps and gives TFII an LTL network running from Canada to Mexico.

Finally, from UPS’ perspective, selling UPS Freight removes a noncore, capital-intensive, extremely low-margin asset that has been underperforming for the entire 15 years it has owned it. The sale frees up cash to de-lever, while raising the company’s margin and return-on-invested-capital (ROIC) profile, and it fits perfectly into new CEO Carol Tomé’s “better not bigger” strategy.