Is This Deal a Game-Changer for YRC Worldwide?

I'll cut right to the chase. "Yes." In more ways than one, this week's deal to "reduce debt by $300 million" at YRC Worldwide (NASDAQ: YRCW  )  is indeed a game-changer for America's biggest LTL trucker.

When you consider that shares of YRC have roughly doubled in price since earlier this month when the Teamsters union agreed to take an up-or-down vote on a new labor agreement offered by YRC you get an idea of how important the deal might be to YRC, or at least how important investors think it is. There is, however, still the question of whether investors are right.


YRC trucks in three lanes -- but management wants to merge those down to two. Source: YRC Worldwide

So let's review. Last month, when outlining YRC's options, I argued the company basically had three roads open to it: First, it could declare bankruptcy. (YRC doesn't much like this one). Second, management could recapitalize the company by selling shares to raise cash and pay down debt. Third, the company could extract wage concessions from its workers, hoping to regain profitability.

From the details YRC has revealed, it appears they've decided to straddle those last two lanes.

YRC's debt reduction deal: By the numbers 
In essence, what YRC has described as its going-forward plan consists of two parts:

First, YRC needs the Teamsters to approve a labor agreement extending earlier-agreed 15% wage cuts into 2019, and permitting management to farm-out work when it needs to, among other concessions. All else hinges on this, with CEO James Welch warning that if the votes come in on January 8 and workers reject the agreement, "it would unfortunately mean some very difficult decisions for the company and its employees." (For a translation of what that means, read this).

Second, and contingent on the first point, YRC has convinced holders of its "Series A" and "Series B" convertible debt to ante up $250 million for 16.6 million-odd new shares of YRC common stock. YRC will then turn around and use this cash to pay off $69.4 million in debt coming due in February, and begin paying down $952 million in debt that comes due in March 2015. Helping with this last goal, some creditors will convert $50 million of debt into common stock, while others give YRC cash in exchange for "preferred stock," convertible into common.

Sounds great! What's the catch?
If you're keeping track, this all adds up to even more than the $300 million in "reduced debt" that YRC touted on Tuesday. But make no mistake: YRC hasn't convinced its bankers to write off this debt. All it's getting them to do is convert debt into equity.

And the 16.6 million new shares' worth of equity that the debt is getting converted into? That's enough to dilute existing shareholders out of two-thirds of their stake in the company. To a lesser extent, this resembles the gambit YRC played back in 2011 -- when YRC handed 97.5% of its equity over to creditors.

Any other catches?
Glad you asked, because yes, there are a couple. As already mentioned, this whole deal hinges on YRC's Teamsters agreeing to extend their pay cuts into 2019. It also depends on creditors, controlling at least 90% of YRC's $124 million pension fund debt, agreeing to extend the deadline for repaying this debt. If either of those plans hits a bump in the road, the whole deal drives into a ditch.

And the upside?
In short, YRC's revival still isn't a sure thing. So why are investors so keen to buy it, despite the uncertainties? Well, because there's a whole lot of upside if everything goes right.

For example, by converting $300 million-plus worth of debt into equity, and potentially negotiating lower interest rates on the rest, YRC hopes to reduce annual interest payments by as much as $50 million. The company is only burning about $55 million annually in negative free cash flow today. Combine $50 million in interest savings with some modest reductions in the cost of labor and YRC could actually turn free cash flow-positive in the not-so-distant future.

Such a development would open up new pathways for YRC to follow. Free cash could be deployed to reduce debt, for example, further reducing interest obligations. It could encourage -- indeed, has encouraged -- investors to believe the company has a future, increase the share price, and enable YRC to sell additional shares to raise cash at higher valuations, so as to pay down debt even faster.

At least ... that's what investors appear to be thinking. But what do you think? Sound off below.


Read/Post Comments (9) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 26, 2013, at 12:15 PM, undertyme wrote:

    I wouldn't touch this stock till after the votes are counted.If it's a yes vote buy buy buy if it's a no vote bye bye bye.

    this is a $40.0 stock if the vote is yes.

  • Report this Comment On December 26, 2013, at 3:19 PM, bowserbruno wrote:

    1) Proposal to put $100's of millions of pension fund obligations into risky stock is unconscionable- remember ENRON? Union would be utterly stupid to accept this.

    2) In Q3 2012, YRC Freight division made $2.8mill. In Q3 2013, YRC Freight lost $9.7mill. Reason- in April, 2013, freight terminals were reorganized, 500 workers were let go. Now remaining terminals can't handle the volumes, resulting in high overtime costs and hiring expensive contract truckers on the spot market. It may take 2 years to stabilize workforce just from this debacle.

    3) YRC road driver wages are now no longer competitive with indefinite 15% pay cut, pension reduced by 75%, loss of a week of vacation after 8 years of service. YRC will continue to loose drivers as a result of the continued and proposed new concessions, adding to the driver shortage and continued high costs. YRC Freight, the biggest YRC division, will never recover from the debacle noted in 2) and REMAIN UNPROFITABLE in spite of the continued and new labor concessions and never contribute to pay off the $1.4 billion YRCW debt.

    4) Only way out is to issue $1 billion new stock and/or sell off part of the company and make steps to retain drivers in the remaining divisions.

    5) I am an experienced YRC Freight road driver with 9 years service, just what the company needs. Why should I not go now to UPS, ABF, or OD and get increased wages and benefits from the start and not have to worry about future bankruptcy or antics by upper management?

    6) Stock is $0.40 a year from now with or without union concessions.

  • Report this Comment On December 26, 2013, at 6:39 PM, TMFDitty wrote:

    Thanks for the feedback, both. You're making this sound like what the analysts call a real "binary" situation: Heads, the stock's worth 40 dollars, tails, 40 cents.

    TMFDitty

  • Report this Comment On December 26, 2013, at 10:32 PM, Yrcspouse wrote:

    Welch is making it sound like this most recent set of concessions is going to pass the only way it will pass is if they count the non eligible votes they are trying to get from retirees or people who are no longer employed by this company. When this was brought up it was told they were only going to extend the current contract but that was a lie of course they went for more. They are trying to only have given 1 .34 raise to non cdl dock workers which they got on April 1 of this year over the life of this contract. That would be .34 over a 10 year period you tell me how you could live with a 15 percent pay cut since 2010 and only get .34 raise since 2008

  • Report this Comment On December 28, 2013, at 12:23 PM, waverunner69 wrote:

    Bruno,all companies are having difficulty finding drivers, here's why you don't want to go to UPS Freight. $15hr to start, no holidays for a year, you don't get discretionary days until the January after your anniversary date. So if you get hired in February you have to wait 20 months. After 3 months you go to $16hr then $17hr after 1 year. At roughly $24hr and no health premiums to pay at YRC, how long will it take you to make up that money? Go apply at ABF and see how long that process takes. You better have a job in the meantime because ABF takes a very long time. As far as OD, I'm sure they will be very reluctant to hire a union driver and from what I understand it is hard to get overtime pay there. These companies will not hire a new driver with no experience or a veteran with a blemished record.I am a driver at YRC with over 20yrs experience. Since the merge I have had 3 other union jobs, all payed under $18hr. I am fortunate that I can get a job pretty much wherever I want, but I still came back to YRC. I believe you were asking why 'you' shouldn't switch and I wanted to give you some examples to think about.

  • Report this Comment On January 03, 2014, at 10:15 PM, bowserbruno wrote:

    Waverunner, B.S. I doubt that you are a YRC driver, because full-scale YRC drivers make $21.04/hr, not $24. At ABF I would start at $19.76/hr, have continued health insurance from the Teamsters, and in 3 years will be making $26/hr, while if I had stayed at YRC, I would be making $22.08/hr in 3 years. Also, my pension would be greater by $75/month for each year if I move to ABF. In 6 years, that would be $350/month greater pension by going to ABF.

    YRC upper management think they are saving money by continuing the harsh wage and pension concessions at least for another 6 years, but this will result in bad driver and yard switcher morale, high driver turnover, high driver shortage, freight delays, dissatisfied customers, and high costs to hire contract carriers on the spot market. How will the company pay off the $1.2 billion debt while not making money?

    YRC upper management also thought they would save money by drastically reorganizing operations in March/April, 2013, but resulted in -$12.5 million difference in Q3 2013 earnings, can't wait to see Q4 2013 earnings to post in 2/2014. Now with a very dissatisfied workforce as a result of the continued and increased wage and pension concessions, YRC looks to me like it is in a death spiral to bankruptcy caused by upper management mistakes.

    This afternoon I applied at ABF, and will post the time it takes to get hired. With my unblemished record and an Eastern Turnpike triples license, I would be welcomed at UPS Parcel and OD, but I would have to relocate.

  • Report this Comment On January 04, 2014, at 2:11 AM, waverunner69 wrote:

    Well Bruno, I am looking at my paystub and it says $24.96 hourly minus the 15% paycut = $21.21. I don't know where you get $21.04hr but that wasn't my point. We don't get pension in the west, our trustees were the only ones who wouldn't allow the reduced payment. ABF will take 4-6 months on average, usually 6 months till they even call you unless you have an inside contact. UPS parcel doesn't hire line drivers, they all move up from package. There is a UPS Parcel hub right down the street from our terminal and I never met a line driver who didn't start out part time as a package handler. If you can get a linehaul job at parcel then by all means, WHY don't you do it? They make over $120K yr, isn't that worth relocating? This was the question you asked. It sounded to me like you were talking about UPS Freight, which would be more reasonable and a better comparison to YRC in a buisiness sense. I wish you luck with ABF. The only jobs they are hiring for here are sleeper. A coworker just flew to another state for an interview with them which lasted 5 hours (he has an inside contact)You must realize that you start as a casual, but being a union driver I'm sure you are aware of that. I believe that the more disgruntled employees that leave YRC the better. There are plenty that appreciate their jobs and believe that money isn't the only thing that is important.

  • Report this Comment On January 05, 2014, at 12:55 PM, 2lazy2loaf wrote:

    I'm a Holland city guy, 22+ yrs. Way I see it this is a live to fight another day situation for both sides. Nobody is happy with the current state of affairs. Companies hands are tied by the amount of debt they're servicing which means they can't effectivley compete in the marketplace. Equipment is getting old increasing maintenance costs etc,etc. Employees are tired of the steady stream of bad news coming from above and so on. Bad situation all around for both. I voted to accept this proposal and I hope it passes for a number of reasons. First is if we ever expect things to get better the FIRST thing that has to happen is the company has to show a steady profit. A rising tide lifts all boats. While the givebacks in the latest proposal are unseemly to say the least they're nothing compared to what we've already been through. 2nd, I WANT to be part of the group that turns this thing around and as bad as some might think things are right now they ARE better than they were a few years ago. Much of the business has come back and more does so every day. 3rd, while some of us may indeed land on our feet in a position comparable to where we are now most won't. Ask yourself a question, If we force the company into bankruptcy, you lost your job as a result, and someone offered you a job with pay and benefits equivalent to what YRC is offering now, would you take it? I think most would say yes. Assuming that, why would you vote yourself out of the job you have? I agree with Waverunner, it"s not all about the money, and if you got no heart for the fight this probably isn't the place for ya. Call me a Fool, I just hate to be beat and I'm not smart enough to quit or give up.

  • Report this Comment On January 06, 2014, at 2:13 AM, bsealex wrote:

    I have no input on this, knowing very little about the trucking industry, but I appreciate both sides. Thank you not only for sharing, but sharing respectfully and intelligently!

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