Yellow Defends Plan to Pay High Price for Roadway

Roadway confirmed its earnings Tuesday, saying it had net income of $6.3 million, or 33 cents a share, in the second quarter, up from $5.7 million, or 30 cents a share, during the same three months of 2002. Analysts were forecasting 33 cents, on average.

Under terms of the deal, Yellow will assume $140 million in Roadway debt, bringing its total debt to $500 million. The company expects the merger to be accretive to earnings within a year, and to create cost savings of $45 million by the end of the second year and $125 million by the end of the fifth year.

Yellow will continue to run both companies separately, however. "From an operating standpoint, there will be no change," said Zollars. "These are two of the best brands in the marketplace."

Several analysts on the conference call questioned this approach. "I wonder why there will not be more a more aggressive combination of hubs," said Mark Levin, an analyst at Davenport. "You have approximately 600 terminals and service centers. I can't imagine you need more than 350 to 400."

Yellow has no plans for significant terminal changes. "We are at a 90% capacity level," said Zollars. "If the economy recovers, that 10% can disappear very quickly."

Volumes from Yellow's manufacturing-based customers have been at economic recovery levels for the past six to eight weeks, helped by the weak dollar. Activity at Roadway has been flat, however.

Yellow expects cost savings to come from combining back-office processes, such as payroll.

One analyst asked why Yellow paid such a high price, absent the ability to deal with capacity issues.

"We are looking at three things: Income stream going forward, accretion and return on invested capital," said Zollars. "We will look at integration opportunities as they develop. The risk is too high to do that now."

Shares of Yellow were down $2.04, or 8.4%, at $22.56 Tuesday afternoon.