FedEx (NYSE: FDX) plots spin-off of specialized freight unit as global delivery industry reshuffles
FedEx (NYSE: FDX)—the global delivery firm known for its white, purple and orange trucks and planes—is joining the spin-off bandwagon, announcing last week that it will separate its specialized “less-than-truckload” freight unit into a new, publicly traded company. The company says the transaction is being undertaken to unlock value for existing shareholders, but it may also help its larger, and more well-known, express package service better compete amid a reshuffling currently underway in the global courier market.
The move comes as FedEx is dealing with headwinds after a 20-year relationship with the United States Postal Service that brought in nearly $2 billion in annual revenue was not renewed earlier this year. Industrywide, efficiency is increasingly on the radar after a month-long postal strike in Canada and the UK government’s recent approval for a takeover of Royal Mail parent company International Distribution Services (LSE: IDS) by Czech billionaire Daniel Křetínský for $4.6 billion. Speculation that US President-elect Donald Trump wants to privatize the USPS, meanwhile, could be adding increased urgency to FedEx’s efforts to strengthen its core business.
“This is the right time to pursue a separation as we respond to the unique dynamics of the LTL market,” CEO Rajesh Subramaniam told investors, referring to the non-core freight service that involves transporting goods for businesses that don’t require full-container capacity. The niche segment competes with specialized logistics firms rather than mainline package couriers, but spinning it off will allow FedEx to concentrate on its flagship express delivery operations. The split follows a similar effort by archrival United Parcel Service (NYSE: UPS), which sold its freight business in 2021. Wall Street often rewards such maneuvers, as diversified conglomerates are typically worth less than the sum of their parts because business segments can carry varying EBITDA multiples.
The prospect of higher returns
Indeed, merger deals tend to attract significant excitement from investors when they’re first announced, but it’s divestments and spin-offs that can lead to higher returns over the long term, according to Wharton School of Business professor Emilie Feldman; she noted many acquisitions actually destroy value. Companies, on the other hand, “can use divestitures strategically and proactively, resulting in very positive performance implications.” That all tracks with research—including a study published in the Journal of Financial and Quantitative Analysis—that shows conglomerates have been on the decline since the 1970s as the benefits of diversification have diminished with the rise of technological specialization.
FedEx didn’t say if it planned to raise any new capital as it separates the two businesses, but the company will conduct the process in a tax-efficient manner. When a unit is spun off, current shareholders receive stock in the new company and don’t face an immediate bill from Uncle Sam if they don’t sell. FedEx shares immediately spiked 10% after the news of the separation last week, but they’ve given most of those gains back amid what’s usually a slow holiday trading period. Loop Capital upgraded its outlook on the delivery firm in the wake of the news and raised its price target to $365. Shares are currently trading at $272.
A chance to refocus on core businesses
CEO Subramaniam said that both resulting FedEx companies would be well-capitalized and poised to benefit from “continued strategic and operational competitiveness and more flexible capital allocation.” He noted that the company is still adjusting to the lost volume from the USPS contract and monitoring developments amid the calls for the privatization of the USPS. “For our industry it’s important that the package delivery business is not subsidized by the US taxpayer,” he added.
While FedEx has trailed the broader S&P 500 so far this year—rising just 7.9% compared to the index’s gain of 26.5%—the Boston Consulting Group says that spin-offs can generally push a stock to outperform the broader market, at least initially. The global advisory also noted that the jettisoning of a unit can create an opportunity to “refocus the investment thesis and value creation strategy of the businesses that remain behind.” FedEx, in other words, will be able to focus on its core business of delivering individual packages in an increasingly complex and competitive environment, while the new Freight firm builds its business unencumbered from the more retail pressures.
“We found that the median company initiating a spin-off outperformed the S&P 500 by 7 percentage points of total shareholder return in the six months after the announcement,” Boston Consulting wrote in a research report. Value creation at new companies generated by spin-offs, however, tends to trail the market in the six months after the close. That means the time to consider holding FedEx shares could be now.
