FedEx acquires Genco in big push to match UPS, DHL in contract logistics

Move affirms FedEx strategy to move beyond transport into other areas of supply chain management.

By Mark B. Solomon

FedEx Corp., making its boldest foray ever into the third-party logistics (3PL) field, said late yesterday it acquired Genco Supply Chain Solutions, a Pittsburgh-based contract logistics provider, for an undisclosed sum.

The deal, scheduled to close sometime in 2015, affirms FedEx's strategy of expanding into areas beyond its core transportation offerings. It also narrows the gap between the company and its rivals, UPS Inc. and DHL Corp., for market share in the global supply chain management segment, an area where, until now, FedEx has not been a relevant player.

Genco will operate as an independent company until the transaction closes, Memphis, Tenn.-based FedEx said in a statement last night. Genco CEO Todd Peters will continue in his position after the deal is done, FedEx said.

It is unclear how Genco will be integrated into FedEx; FedEx currently has a small supply chain group, and there appears to be little, if any, overlap between FedEx and Genco. Also unclear is how much FedEx paid for Genco. According to Benjamin J. Hartford, transportation analyst at investment firm Baird, other high-quality 3PLs have fetched a multiple of between 7 and 9 times earnings before interest, taxes, depreciation, and amortization (EBITDA), a marker of cash flow. For example, XPO Logistics Inc., a fast-growing 3PL, paid a multiple of around 8 in July when it acquired New Breed Logistics, also considered a top-tier contract logistics provider, according to Hartford.

Benjamin Gordon, CEO of BG Strategic Advisors, a mergers and acquisitions firm specializing in the transportation and logistics sector, said Genco should be assigned a multiple of 10 times EBITDA. Based on an estimate by SJ Consulting, a consultancy, that Genco generates about $208 million in annual EBIDTA, FedEx would then have paid more than $2 billion.

Genco, founded in 1898 and privately held, is one of the largest North American companies in the contract logistics segment, where providers offer warehousing and distribution services to companies on a contractual basis and deliver transportation management solutions under that umbrella. Genco generates $1.6 billion in annual revenue and manages 35 million square feet of North American warehouse space from more than 130 locations. Only Exel/DHL Supply Chain, a unit of DHL, has a larger North American warehouse footprint among what are known as value-added, warehouse and distribution 3PLs, according to Evan Armstrong, president of Armstrong & Associates Inc., a consultancy that tracks the 3PL business.

Reverse logistics accounts for about 40 percent of Genco's revenue, according to Armstrong, who called the company the dominant player in the fast-growing segment. Genco gained a strong position in high-tech reverse logistics after its mid-2010 acquisition of ATC Technology. Besides technology, Genco's most active vertical segments are health care, retail, and consumer/industrial.

Like many leading 3PLs, Genco offers an array of traditional forward and reverse logistics services. It has also built what Armstrong said is an impressive suite of IT solutions to support its product lifecycle services. Armstrong called Genco a "technological generation ahead of most value-added warehousing and distribution 3PLs."

In a touch of irony, Genco's parcel management services unit is counseling customers on how to prepare for the possibility of significant rate increases once FedEx and rival UPS Inc. shift to dimensional pricing models from weight-based systems for packages measuring less than 3 cubic feet. The FedEx change takes effect Jan. 5.

For FedEx, the acquisition is likely to trigger a sizable increase in package business from product returns. In turn, Genco, whose operations are North American-centric, will have access to FedEx's global transportation and logistics network.

Neither company commented beyond a press release issued last night under the FedEx logo. FedEx executives are sure to be quizzed on the transaction when the company releases its fiscal second quarter 2015 results tomorrow.

FEDEX'S HISTORY OF ACQUISITIONS

The acquisition is FedEx's first in the U.S. since May 2006, when it bought Watkins Motor Lines, a Lakeland, Fla.-based less-than-truckload (LTL) carrier for $780 million. FedEx has had a fleeting but unsuccessful history with contract logistics companies. In 1998, it acquired Caliber Logistics, Caliber Systems Inc.'s contract logistics unit, in the same transaction that included Roadway Package System Inc. (RPS), Caliber's parcel-delivery operation.

FedEx transformed RPS into what is now known as "FedEx Ground," which has become a highly successful ground parcel delivery operation. However, Caliber Logistics, considered at the time to be a solid operator, would effectively drop off FedEx's radar screen, and eventually out of sight.

If FedEx ignored Caliber Logistics, it could have been because it never saw much value in the contract logistics business, believing it to be a low-margin endeavor requiring more effort than it was worth. But through the years, UPS and DHL have built sizable global supply chain operations to augment their transportation services, leaving FedEx to wonder if it should rethink logistics.

FedEx took a major step in that direction two years ago, when it announced a revamp designed to add $1.6 billion annually to its bottom line by 2016 through a mix of cost cuts, productivity enhancements, and yield improvements. The centerpiece of the strategy has been a heavier focus on the ground parcel segment and a lessening of the role traditionally played by FedEx's air express business, which is still its largest revenue produce. However, FedEx made clear it would play a more active role in nontraditional segments like supply chain management, freight forwarding, customs brokerage, and rail intermodal, and that it would aggressively court vertical industries with custom solutions similar to those offered by UPS and DHL.

The Genco acquisition, according to Armstrong, takes that strategy to an entirely new dimension. "This is a gargantuan deal and ramps up FedEx's supply chain competitiveness with UPS...for retail, high tech, and health care customers," he said.