Editor's note: Updated to include letter from Arkansas Best Corp. President and CEO Judy McReynolds to company employees.
The company that is a target of a $750 million lawsuit filed by Fort Smith-based Arkansas Best Corp. recently made an attempt to buy Arkansas Best’s largest subsidiary, ABF Freight System.
According to this report from trade publication DC Velocity, YRC Worldwide CEO James Welch met March 22 in Fort Smith with Arkansas Best President and CEO Judy McReynolds to discuss the idea.
According to the DC Velocity report, Arkansas Best officials declined a detailed discussion on the YRC offer, and have said no further talks have been held on the matter.
Neither company has made a filing with the U.S. Securities and Exchange about the meeting. A 10-Q filed Wednesday (May 8) with the SEC by Arkansas Best did not include mention of the meeting between McReynolds and Welch.
ABF generates about 78% of Arkansas Best revenue.
McReynolds sent the following letter to employees late Wednesday.
Dear Fellow Employee:
I wanted to let you know that the story pasted at the bottom of this email ran tonight online in the DC Velocity publication, involving an unsolicited approach by YRC’s CEO to me in March regarding a potential acquisition of ABF by YRC. We filed the following statement with the Securities and Exchange Commission tonight.
“Arkansas Best Corporation (“ABC”) acknowledged today, in response to a third-party inquiry, that in late March, YRC Worldwide Inc. (“YRC”) approached ABC and expressed YRC’s interest in exploring an acquisition of ABF Freight System, Inc. (“ABF”). ABF is ABC’s largest subsidiary. In early April, ABC advised YRC that ABF was highly focused on its ongoing labor negotiations as well as other strategic and operational initiatives and that considering a transaction with YRC was not appropriate at that time. ABC has not engaged in any subsequent discussions with YRC.”
The reason that we filed this update with regulators is because we’re a publicly-held company owned by our shareholders. As the statement says, there have been no further discussions between YRC and Arkansas Best.
I thought it best that you hear this from me directly and I thank you for your time and attention.
MUTUAL FINANCIAL STRUGGLES
Overland Park, Kan.-based YRC is a direct competitor with ABF Freight in the less-than-truckload carrier sector. Both companies have struggled to cobble together a trend of positive financial performance following a freight recession that began in 2006. A special Teamsters agreement helped pull YRC from the brink of bankruptcy.
Arkansas Best has been unable to post two consecutive years of income gains since 2008. The company posted a loss of $7.7 million loss in 2012. Net income for 2011 reached $6.159 million, a huge swing from the $32.693 million loss during 2010. The company posted a net income loss of $127.522 million loss in 2009, with $64 million representing an accounting charge.
YRC reported on May 3 its first quarterly positive operating income in six years. Some of the Teamster help is the source of the lawsuit.
PENDING LAWSUIT
Arkansas Best has alleged that wage deals between the Teamsters and YRC, a competitor of ABF Freight, violated a National Master Freight Agreement (NMFA). The NMFA, implemented April 1, 2008, was designed to create equal labor costs and other benefit payments among trucking companies with drivers represented by the Teamsters.
That lawsuit, first filed in November 2010, was recently dismissed a second time by U.S. District Court Judge Susan Webber Wright (Eastern District of Arkansas). Arkansas Best officials say they will again appeal the dismissal to the U.S. Eighth Circuit Court of Appeals (St. Louis).
Oral arguments were heard in St. Louis on April 10, and Arkansas Best officials noted in the 10-Q released May 8 that they expect a court decision “within 60 to 90 days.”
PENDING LABOR CONTRACT
There could also be more news about a vote on a new labor contract between Arkansas Best and the Teamsters.
ABF Freight System and the Teamsters announced May 3 they had reached a tentative agreement on a five-year labor contract. Neither side would release details on the agreement.
The next step will include the Teamsters and company officials educating union members about the terms of the contract. The contract will eventually face a vote of qualified union members.
The existing labor contract between ABF and the International Brotherhood of Teamsters was initially set to expire March 31 for the about 7,500 Arkansas Best employees represented by the Teamsters.
Although details of the agreement are unknown, Stephens Analyst Brad Delco believes the new contract most likely provides some level of cost relief for ABF. Delco, in his note released Monday (May 6), moved the share price (NASDAQ: ABFS) from a $12 target to $18.
PRICE INCREASE
The reasons behind the new price target and the share price rise with ABFS in recent days would make the acquisition price steeper for YRC.
YRC shares (NASDAQ: YRCW) closed Wednesday at $13.93, down 36 cents. During the past 52 weeks, the share price has ranged from a $16.45 high to a $5.01 low.
Arkansas Best shares closed Wednesday at $15.35, up 36 cents. During the past 52 weeks, the share price has ranged from a $15.58 high to a $6.43 low.
Although YRC typically generates more than double the annual revenue of Arkansas Best, YRC is leveraged to the teeth. It’s Standard & Poor's credit rating as of March 31, 2013, was a dismal “CCC.” YRC carries about $1.36 billion in debt.
“We have a considerable amount of indebtedness, a substantial portion of which will mature in late 2014 or early 2015,” the company noted in its recent 10-Q filing. “The refinancing of these debt obligations is outside of our control and there can be no assurance that such transaction will occur, or if it does occur, on what terms.”
The long-term debt for Arkansas Best is $105.169 million.