Yellow Defends Plan to Pay High Price for Roadway

Updated from 10:48 a.m. EDT

Yellow(YELL Quote) agreed to acquire Roadway Services (ROAD Quote) for cash and stock worth $48 a share, a 60% premium over a recently beaten-down price.

Officials at Yellow argued on a conference call with analysts that the valuation is reasonable. "It was not too long ago that Roadway was trading at $40 a share. So we think $48 a share is fair value," said William Zollars, the company's chief executive. Shares of Roadway closed Monday at $30.02, but had traded as high as $39.40 as recently as May 6. On Tuesday afternoon, the stock was up $15.43, or 51%, at $45.43.

"The industry is ripe for consolidation," said John Barnes, an analyst at Deutsche Bank. "Right now, there is too much capacity chasing too little freight. Companies are trying to put a dent in capacity." For the past year, truck companies have suffered from weak sales amid a slow economy.

In September, Consolidated Freightways filed for Chapter 11 bankruptcy protection and sold off assets. In the aftermath, Yellow and Roadway gained market share, but not enough.

Shares of Roadway dropped 17% on June 5 after the company warned that second-quarter earnings would be about half of what analysts had expected, due to a bad freight mix. At the time, the CEO of Roadway, James Staley, said "the demise of Consolidated Freightways has proven to be a double-edged sword. The business made available was welcome, but quickly absorbed due to surplus capacity."

The $966 million merger (or $1.1 billion including debt) combines two of the biggest overland freight haulers in the country, as well as two fierce rivals. They had combined revenue of about $6 billion in the 12 months to the end of March 2003.