FedEx announces that FedEx Freight will be separated into its own standalone company

In its fiscal second quarter earnings announcement issued earlier today, Memphis-based global freight transportation and logistics services provider FedEx said that the company’s Board of Directors, following a review of the role of its less-than-truckload (LTL) subsidiary, FedEx Freight, in its portfolio, has elected to make a push to fully separate the unit into a new publicly-traded company.

FedEx officials said this separation is expected to be completed within the next 18 months and achieved in what the company called a tax-efficient manner for FedEx stockholders.

This development does not come as a surprise, considering that in its fiscal fourth quarter earnings announcement in June, FedEx said it was “conducting an assessment of the role of FedEx Freight in the company’s portfolio structure and potential steps to further unlock sustainable shareholder value.”

FedEx Freight was created in in 2001, when FedEx Corp. acquired and merged the assets of American Freightways, Viking Freight and Watkins Motor Lines.

It has since become the largest carrier in the LTL space. In 2022, it posted $10.18 billion in revenue, an 18.5% percent boost in revenue from the previous year, according to figures compiled by SJ Consulting. But last year, FedEx Freight slipped. Its revenue dropped 10.6% to $9.01 billion, according to SJ Consulting. It still ranked as the largest LTL carrier in the country.

For the fiscal second quarter results announced today, FedEx Freight revenue, at $2.177 billion, down from $2.329 billion a year ago. Quarterly operating results saw declines, due to fewer shipments, lower fuel surcharges, and reduced weight per shipment that was partially offset by higher base yield.

FedEx Freight fiscal 2024 revenue came in at $9.4 billion.

On the company’s earnings call today, FedEx President and CEO Raj Subramaniam said FedEx believes pursuing a full separation of this business will result in two industry-leading public companies, adding that it will unlock significant value for stockholders while allowing for continued commercial operational and technological cooperation between both businesses.

“The separation will also enable both companies to benefit from enhanced focus and competitiveness for FedEx,” he said. “This will ensure strong execution of our near- and longer-term strategic priorities, while preserving the benefits Freight and FedEx enjoy from their longstanding connectivity. Each independent company will be well capitalized, with flexibility to invest in profitable growth while continuing to return capital to shareholders.”

Explaining the value proposition of this separation for FedEx and FedEx Freight, Subramaniam explained that FedEx will be creating what he called a leading LTL pure play, as well as the largest carrier by revenue, with the broadest network.

“FedEx Freight has deep relationships with customers who turn to us for our reliability, simplicity and choice of services,” he said. “Freight has maintained its leading market share position for a long time and increased operating profit nearly 25% on average per year over the last five years, expanding operating margin by approximately 1,100 basis points. The team's focus on safety facility utilization, revenue, quality and operational efficiency has driven this performance, and these factors will continue to guide Freight forward with a strategy supported by a strong balance sheet as a separate company, and it will be better positioned to unlock its full value potential areas, where we see the greatest opportunity.”

FedEx highlighted various components of the strategic rationale for the separation of FedEx Freight into an independent company, with benefits for FedEx and FedEx Freight, including:

• Enhanced Operational Focus and Strategic Execution: Deeper operational focus, accountability, and agility to meet customer needs will better enable both companies to capture profitable growth opportunities and unlock market value. FedEx will continue executing its strategic initiatives, including DRIVE, Network 2.0, and Tricolor;
• Distinct and Compelling Investment Profiles: Separate public stock listings with distinct stockholder bases will enhance the value proposition for each company;
• Strong Balance Sheet and Capital Allocation Optionality: Each company will be well-capitalized, with flexibility to invest in profitable growth and return capital to stockholders;
• Maintained Commercial, Operational, and Technology Synergies: The benefits of the existing FedEx and FedEx Freight relationships will be optimized through commercial agreements between the two entities to maintain operational and service-level continuity. Ongoing collaboration will be designed to improve the value propositions of both companies by accelerating speed, improving coverage, and driving efficiencies that will lower the cost to serve; and
• A Shared Brand: The FedEx brand represents speed, reliability, and trust. These values will extend across both businesses with the new company continuing to operate under the FedEx Freight name

Scooter Sayers, principal of LTL consultancy Sayers Logistics, told LM that this is great for FedEx Freight as it allows them to pursue their own unencumbered path. 

“I feel that Freight has been held back by their parent,” he said. “They may be the biggest LTL carrier in the U.S., but they are a small entity relative to Express. This is also good news for the rest of the LTL carriers as the valuation of an independent FedEx Freight should further substantiate the value that LTL carriers provide. The real winner may turn out to be Old Dominion. As FedEx Freight spins off solo, their cost structure will increase as they have to build out their own dedicated sales force, administrative functions like HR, the executive suite, and even the pricing department. They have been getting a shared cost deal as part of the FedEx umbrella, and thus their OR will likely jump 2-3 points as an independent entity. That will put more separation between Old Dominion and the other LTL carriers, further solidifying how well they operate.”

TD Cowen analyst Jason Seidl wrote in a research note that this standalone LTL entity will be the largest LTL by revenue and the only carrier to offer a priority service.

“FedEx plans to bring in a dedicated sales force and lean into productivity initiatives; there is still a ~10% margin gap between them and ODFL which suggests more opportunity for FedEx,” he wrote. “Freight and legacy FedEx have signed agreements that will continue to connectivity of the two networks which was a primary question for investors trying to value potential dis-synergies. Customer bundling was also an investor concern which we asked on the call—while a majority of small customers do bundle (though a majority of their total volumes are not bundled), they are largely done with independent contracts so likely won't be a friction point with customers. Near-term LTL estimates are revised lower as pressure on both weight and volume due the challenged industrial market weighs on performance.”