Overnite Deal Fills Gap for UPS

Overnite will give UPS ground freight services, matching FedEx's offerings.
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Wall Street thinks the sizable premium

UPS

(UPS) - Get Report

is paying to acquire trucker

Overnite Corp.

(OVNT)

is worth it.

The early view is that the $1.25 billion cash acquisition will fill in a missing piece of UPS' portfolio as it strives to become a one-stop shop for customers' supply-chain and shipping needs. Overnite, based in Richmond, Va., will give UPS ground freight services, matching rival

FedEx's

(FDX) - Get Report

capabilities.

"FedEx has been very successful with its freight division," says Jim Corridore, an equity analyst at Standard & Poor's. "It has been very profitable for the company. UPS is moving to close whatever competitive disadvantage it had with FedEx on that score."

Earlier Monday, Atlanta-based UPS said it would pay $43.25 a share in cash for Overnite, a hefty 46% premium to Overnite's closing level of $29.58 Friday. The announcement prompted investors to snap up Overnite shares, driving their price $12.76 higher to $42.34 by midday on heavy volume of 5.7 million shares.

UPS investors appeared to give a thumbs-up to the deal, bidding shares 99 cents higher to $73.14.

"Obviously, the deal's not cheap," says Corridore, whose company does no investment banking but whose affiliates may provide other services to companies its analysts cover. "But I wouldn't view it as that expensive, either. They're paying $1.25 billion, which is less than one year's sales for Overnite. It's a profitable company."

Indeed, Overnite earned $63.3 million last year on $1.65 billion in revenue. (UPS, the world's largest package deliverer, earned $3.33 billion in 2004, with $36.58 billion in sales.)

The hope, though, is that Overnite will do more than just add its existing results to UPS' income statement.

"If you've got a current Overnite customer, there's the opportunity for UPS to sell them small-package services," says Mark Davis, an analyst at FTN Midwest Research. "UPS can say, 'Let us simplify your accounts payable process.'"

At the same time, UPS can now sell bigger jobs to its existing customers.

"We've heard from our contacts throughout the industry saying, 'We're very interested in UPS having a less-than-truckload solution as part of their overall offerings,'" says Davis, who owns no shares of UPS and whose company does no investment banking.

Overnite specializes in what is called less-than-truckload ground freight, loading multiple shipments into truck trailers. Although UPS in the past has split less-than-truckload shipments into pieces and sent them through its package network, it's not equipped for larger shipments or odd-shaped items such as large metal drums.

FedEx has been offering less-than-truckload freight for some time, having acquired Viking Freight in 1998 and American Freightways in 2001.

Both FedEx and UPS are seeking to provide business customers around the world with a full range of shipping and supply-chain options. Doing so could help UPS overcome stagnation in its domestic ground package business. It recently bolstered its air freight services by acquiring Menlo Worldwide Forwarding.

"Overnite is a perfect strategic fit for our company," said Mike Eskew, UPS' chairman and CEO, in a press release. "We want to offer our customers the broadest portfolio of transportation and logistics services available from a single source, and this is an important capability that we needed to have."

UPS hopes to close its latest deal sometime during the third quarter. It still must receive approval from Overnite shareholders and pass regulatory muster. But the government is unlikely to oppose it, says Davis at FTN Midwest, because regulators didn't raise red flags on the pending merger of truckers

Yellow Roadway

(YELL)

and

USF Corp.

(USFC)

.

Labor integration does pose some merger risks, however, analysts caution. The vast majority of Overnite's 14,200 workers are non-unionized, whereas the Teamsters union represents some 229,000 UPS workers.