UPS' (NYSE:UPS) decision to sell its troubled less-than-truckload (LTL) carrier, UPS Freight, to Montreal-based TFI International (NYSE:TFII) puts the LTL industry, for the most part, in Big Brown's rearview mirror. UPS will no longer spend millions of dollars a year to prop up a noncore business whose margins and operating ratio — the ratio of expenses to revenues — have become embarrassments to a company renowned for its operating efficiency. It will end dealings with 11,500 Teamster workers, an aggressive group who forced UPS to shut down the unit's operations in 2018 over a contract dispute, and whose costs made UPS Freight uncompetitive in a largely nonunion industry. The $800 million in TFI cash for the unit will provide UPS with significant capital to be used to pay down debt or re-invest into faster-growing segments of delivery.

For TFI, as savvy an operator as there is in trucking, the deal presents opportunities and risks. In terms of geographic reach, the TFI unit, TForce Freight, becomes arguably North America's premier LTL carrier. It adds a sizable U.S. network and Mexican connections to its intra-Canadian and northern border operations. TFI acquires 197 well-maintained North American terminals and 6,340 tractors and trailers. It also gains a little-noticed but well-run dedicated truckload business, which accounts for about 9% of UPS Freight's $3.1 billion in annual revenue. The truckload unit will be embedded with the old Contract Freighters operation that was acquired in 2016 from XPO Logistics Inc. (NYSE:XPO) and that is now headed by Greg Orr, a highly regarded truckload executive. 

TFI has a long-held reputation for maximizing value from its costing and pricing initiatives. It will clearly make some changes at UPS Freight. A small part of a massive parcel-delivery business, UPS Freight was positioned from the start as a loss leader. UPS bundled the unit's services with its higher-margin small-package portfolio, and priced the LTL business below the market with the idea that shippers would send it more parcel business along with the cut-rate LTL traffic. 

It is unclear whether the strategy was effective in pulling in more parcel business. However, the low rates, combined with labor costs that are 10% to 11% above the industry average and an inability to command premium rates charged by elite rivals Old Dominion Freight Line Inc., (NASDAQ:ODFL), Saia Inc. (NASDAQ:SAIA) and XPO were too heavy a rock for UPS Freight to continue pushing uphill. Based on data that UPS disclosed on Monday, UPS Freight currently has an operating ratio (OR) of 98%, meaning it spends 98 cents for every dollar in revenue. By contrast, Old Dominion, the gold standard for LTL, reported a stunning 74.5% OR in its third quarter. TFI has vowed to drive down TForce Freight's OR to 90% within three years.

TFI will also have to contend with a collective bargaining agreement that expires in 2023, and the possible static from a formidable group of Teamsters. TFI, which has said it will honor all existing contracts, has a unionized unit in its portfolio. However, dealing with trucking Teamsters, especially a group that fought a bitter but futile war to organize Overnite from 1999 to 2002, may be different than working with Canadian labor. "It's like letting a bear in the room," said an LTL industry executive. TFI's ability to sustain solid margins may depend on what savings and efficiencies it gleans from the next contract.

TFI does not have skin in the parcel game — though it operates a decent-sized last-mile delivery business — and has no motivation to maintain bundles and tolerate cut-rate LTL yields as does UPS. TFI will either raise rates on existing customers or cut them loose entirely, said Jason Seidl, analyst for Cowen & Co. Even with higher rates, TFI may retain more business than expected because former UPS Freight shippers will be hard-pressed to find attractive alternatives in a sector where pricing is firm and carriers have stayed disciplined, Seidl said in a note on Monday.

For its part, TFI is bullish on the prospects of managing such a vast LTL network. In a 15-page presentation posted on its website, TFI said the transaction is expected to be accretive to diluted earnings-per-share results in 2021, and will be "substantially accretive over time." The company has made 90 acquisitions in the past 12 years, and its shares have risen, on a cumulative basis, 9,604% in the past 20 years. That blows away comparable returns from its peer group, the S&P 500, and the Toronto Stock Exchange's TSX.

Although UPS is shedding LTL ownership, it is far from exiting the segment. Under the terms of a "transition services agreement," UPS will, for at least the next five years, resell a UPS Freight offering for TFI known as Ground Freight Pricing, where a grouping of parcels weighing more than 150 pounds and not requiring palletization moves through UPS' parcel processing network but is priced as cheaper LTL consignments. The program, considered the only one of its kind in LTL, generates about 12% of UPS Freight's $3.1 billion in annual revenue. The reselling agreement puts UPS in the unusual role of acting like a general sales agent on behalf of another company.