Project West
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Discussion Materials
October 10, 2001
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Morgan Stanley
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Project West
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Key Observations
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o Based on the o Given M Company's sustained strong performance over the
analysis of last year, an analysis of the current, 3 month, 6 month
numerous relevant and 1 year average stock price would imply that the
metrics and "unaffected" stock price of M Company is approximately
factors, the $8.00 per share
$12.10 per share
offer price for M - The current cash offer of $12.10 per share represents a
Company appears reasonable premium across all these metrics:
to be reasonable
- Unaffected: 51.3%
- As of 10/8/2001: 27.2%
- 3 month average: 37.0%
- 6 month average: 35.7%
- 12 month average: 52.6%
o The analysts who cover M Company are bullish in their
commentary and those setting a price target have set it
at a level above the $12.10 cash offer price
o In examining the trading multiples of comparable LTL
companies, the $12.10 cash offer price implies
acquisition multiples that are below the median trading
multiples of other publicly traded regional,
non-unionized LTL's
o In examining precedent transaction multiples, the
$12.10 cash offer price represents a significant
discount to all other selected precedent LTL
transactions, including the recent Arnold acquisition
o An examination of the premium paid in these
transactions suggests a control premium of
approximately 40-60% is appropriate
o Furthermore, when one considers the 0.26x exchange
ratio for the stock offer, this also translates to a
reasonable premium to current and recent historical
exchange ratios
Morgan Stanley
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Project West
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M Company's Unaffected Stock Price Has Likely Increased
Since April
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o Given M Company's
sustained strong
performance over
the last year, an
analysis of the
current, 3 month,
6 month and 1 year
average stock price
would imply that
the "unaffected"
price of M Company
is approximately
$8.00 per share
[Graph of Stock Price Since IPO - From
o The current cash offer 11/25/97 to 10/08/01]
price of $12.10 per share
represents a reasonable
premium across all
relevant metrics:
o Unaffected price:
51.3%
o As of 10/8/2001: 27.2%
o 3 month average:
37.0%
o 6 month average:
35.7%
o 12 month average:
52.6%
Morgan Stanley
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Project West
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Summary of Analyst Commentary
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o The analysts who Summary of Research Analyst Recommendations
cover M Company ---------------------------------------------------------------------------------------------
are bullish in Price and Report 2001E 2002E Price Target
their commentary Date Firm Recommendation $ $ $ $
and those setting ---------------------------------------------------------------------------------------------
a price target 7/24/01 Morgan Keegan Outperform 9.75 0.95 1.10 N/A
have set it at a ---------------------------------------------------------------------------------------------
level above the 7/25/01 ABN AMRO Add 9.75 1.00 1.15 13.22
$12.10 cash offer ---------------------------------------------------------------------------------------------
price 10/8/01 First Call 9.51 0.98 1.13 N/A
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10/8/01 I/B/E/S 9.51 0.98 1.13 N/A
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Selected Research Analyst Commentary
Comments
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o While we have lowered earning estimates for the
remainder of this year and next, these cuts are a
reflection on the foreseeable freight environment more
so than on M Company. M Company shares, trading at a
slight premium to below book value and at only 9x next
years estimate represent outstanding value in our
opinion. The company maintains a clean balance sheet
with zero net debt.
- Morgan Keegan,
7/24/01
o M Company is a premium service provider in a very
challenging geographic region. Though we do not yet see
any signs of fundamental strengthening of the freight
environment, M Company is solidly profitable and it
generates strong free cash flows. This is a valuation
that investors should find quite compelling, especially
in a period of economic uncertainty. We reiterate our
Outperform rating on M Company shares.
- Morgan Keegan, 7/24/01
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o We were particularly impressed by the company's
operational results in the quarter, as M Company's
tonnage increased 10%, representing one of the fastest
rates of volume growth in the LTL industry. Total
revenues increased 10% to nearly $35MM after factoring
in a 17% increase in M Company Distribution System's
top line.
- ABN AMRO, 7/25/01
o We feel confident in our estimate of $1.00 for 2001 as
we are encouraged by the company's efforts in growing
its business. Indeed, it appears that M Company is
taking market share from some of its Western
counterparts as it has been able to generate a double
digit growth rate by expanding business from its
existing client base and by adding new customers
- ABN AMRO 7/25/01
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Morgan Staney
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Project West
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M Company Valuation Matrix
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o At 4.0x 2001 LTM(3) 2001(4)
EBITDA and 12.8x ------------------------------ ----------------------------
2001 P/E, the Premium to
acquisition current Equity Aggregate EBITDA EBIT Net Income EBITDA EBIT Net Income
multiples of Price Stock Price Value(1) Value (2) $18.9 $10.3 $6.8 $19.7 $10.2 $6.3
the $12.10 cash ($) ($9.51) ($MM) ($MM) x x x x x x
offer price
represent 9.50 (0.11%) 62.57 60.41 3.2 5.9 9.3 3.1 5.9 9.9
a meaningful
discount to the 9.75 2.52% 64.28 62.12 3.3 6.0 9.5 3.2 6.1 10.2
median trading
multiples of 10.00 5.15% 65.99 63.82 3.4 6.2 9.8 3.2 6.3 10.5
other publicly
traded regional, 10.25 7.78% 67.69 65.53 3.5 6.4 10.0 3.3 6.4 10.7
non-unionized
LTL's 10.50 10.41% 69.40 67.24 3.6 6.5 10.3 3.4 6.6 11.0
10.75 13.04% 71.11 68.95 3.6 6.7 10.5 3.5 6.8 11.3
11.00 15.67% 72.82 70.65 3.7 6.9 10.8 3.6 6.9 11.6
11.25 18.30% 74.52 72.36 3.8 7.0 11.0 3.7 7.1 11.8
11.50 20.93% 76.23 74.07 3.9 7.2 11.3 3.8 7.3 12.1
11.75 23.55% 77.94 75.77 4.0 7.4 11.5 3.8 7.4 12.4
12.00 26.18% 79.65 77.48 4.1 7.5 11.8 3.9 7.6 12.6
12.10 27.23% 80.33 78.16 4.1 7.6 11.9 4.0 7.7 12.8
12.25 28.81% 81.35 79.19 4.2 7.7 12.0 4.0 7.8 12.9
12.50 31.44% 83.06 80.90 4.3 7.9 12.3 4.1 7.9 13.2
12.75 34.07% 84.77 82.60 4.4 8.0 12.5 4.2 8.1 13.5
13.00 36.70% 86.47 84.31 4.5 8.2 12.8 4.3 8.3 13.7
13.25 39.33% 88.18 86.02 4.5 8.4 13.1 4.4 8.4 14.0
13.50 41.96% 89.89 87.73 4.6 8.5 13.3 4.5 8.6 14.3
Morgan Stanley
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Project West
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Comparable Company Analysis
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Equity Agg.
Value Value(1) P/E
Price N12M CY2001 CY2002
$ $MM $MM x x x
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M Company 9.51 56 54 8.6 9.8 8.5
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Regional Non-Unionized LTL's
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USFREIGTWAYS CORP 31.43 826 1,056 13.6 18.3 12.9
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CNF INC. 22.96 1,121 1,712 19.2 nm 16.6
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OLD DOMINION FREIGHT 10.35 86 174 6.7 8.3 6.5
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ARNOLD INDUSTRIES INC (2) 21.01 521 477 13.5 15.9 13.0
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Mean 13.2 14.2 12.3
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Median 13.2 15.9 13.0
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National Unionized LTL's
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ROADWAY EXPRESS INC (2) 24.00 465 411 8.8 12.5 8.3
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YELLOW CORP 18.95 462 663 8.6 18.1 7.8
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ARKANSAS BEST CORP 20.85 430 574 8.5 11.8 8.1
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CONSOLIDATED FREIGHTWAYS 4.65 102 149 Nm Nm 14.3
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Mean 8.7 14.1 9.6
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Median 8.6 12.5 8.2
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S&P 500 COMPOSITE 1,062.44 nm na 21.0 25.4 20.3
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5 Yr N12M
Est PE/ Agg. Value/LTM Agg. Value/2001E Agg. Value/2002E
Grwth Grwth EBITDA EBIT EBITDA EBIT EBITDA EBIT
% x x x x x x x
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M Company 11.0 0.8 2.8 5.2 na na na na
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Regional Non-Unionized LTL's
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USFREIGTWAYS CORP 15.0 0.9 4.3 8.2 4.9 9.7 4.0 7.4
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CNF INC. 12.0 1.6 4.8 11.1 5.8 12.3 4.1 7.0
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OLD DOMINION FREIGHT 15.0 0.4 3.4 7.7 na na na na
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ARNOLD INDUSTRIES INC (2) 9.0 1.5 5.3 8.6 na na na na
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12.8 1.1 4.5 8.9 5.3 11.0 4.1 7.2
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13.5 1.2 4.5 8.4 5.3 11.0 4.1 7.2
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National Unionized LTL's
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ROADWAY EXPRESS INC (2) 10.0 0.9 2.7 4.4 3.2 6.5 2.7 5.0
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YELLOW CORP 9.0 1.0 2.8 6.0 3.1 7.2 2.5 4.7
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ARKANSAS BEST CORP 7.0 1.2 3.2 4.8 3.7 5.9 3.0 4.1
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CONSOLIDATED FREIGHTWAYS 5.0 na 5.7 nm 2.7 nm 1.9 6.5
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7.8 1.0 3.6 5.1 3.2 6.5 2.5 5.1
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8.0 1.0 3.0 4.8 3.1 6.5 2.6 4.9
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S&P 500 COMPOSITE na na na na na na na na
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Source: FactSet Research Systems; nm = not meaningful, na = not available;
Earnings Estimates are from IBES where available and First Call elsewhere (Mean
estimates used for each)
Morgan Stanley
Notes
1. Aggregate Value = Market Value + ST & LT Debt + Preferred Equity +
Minority Interest - Cash
2. On 8/22/01, Roadway announced that is is buying Arnold for $21.75
per share in cash
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Selected Precedent LTL Transactions
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o Precedent LTL LTL Transactions Aggregate Value/LTM
transactions have Premium
been historically Equity Aggregate Price/ Unaffected
valued at 5.0-11.0x Date of Acquiror/ Value Value Revenue EBITDA EBIT Earnings Price
LTM EBITDA Announ- Acquiree Business Description $MM $MM x x X x %
o However, some of cement Roadway/Arnold A regional next-day 446.7(1) 510.0 1.1 5.7 9.2 12.6 21
these transactions 8/22/01 Industries less-than-truckload,
are dated irregular eoute and
o Roadway's recent dedicated truckload
acquisition of carrier and provider
Arnold was valued of a variety of
at 5.7x LTM EBITDA logistics services
o At 4.0x LTM EBITDA, 11/13/00 FedEx Scheduled, for-hire 950.0 1,200.0 0.9 6.8 10.3 17.3 61
the $12.10 cash Corp./American carrier of LTL
offer price Freightways shipments of general
represents a commodities, serving
significant direct all points in
discount to Arnold 40 contiguous states
and all other 6/7/99 Yellow Corp./ Provides trucking 154.5 194.5 0.8 5.8 10.9 16.1 51
selected precedent Jevic service; utilizes a
LTL transactions Transportation simplified in-route
o An examination of Inc. delivery system in
the premia paid in which over 70% of the
these transactions shipments are delivered
suggests a control to heir destinations
premium of directly from
approximately 40-60% line-haul trailers
is appropriate 11/4/98 Yellow Regional LTL N/A N/A N/A N/A N/A N/A N/A
o Rumors of Arnold's Corp./Action transportation company
sale were in the Express, Inc. provides overnight
marketplace for and second-day service
quite some time, in the Pacific Northwest
making premia data and the West
less relevant for 10/6/97 FedEx Holding company which 2,471.4 2,664.1 1.0 7.7 12.5 24.2 43
this transaction Corp./Caliber through its subsidiaries
Systems Inc. provides a broad range
transportation services,
including national and
regional general trucking,
small package delivery and
custom logistics services
3/17/97 Super Group Regional trucking and 59.8 59.8 N/A N/A N/A N/A N/A
Hldgs/Regional shipping company
Transporters
7/10/95 Arkansas Best Freight transportation 72.2 143.5 0.2 11.0 N/M N/M 16
Corp./ holding company which
Worldway Corp. operates full-service
vehicle and driver leasing
services, freight and
trucking services, and a
variety of third-party
logistics services
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Mean 0.8 7.4 10.7 17.6 38.4
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Median 0.9 7.7 10.6 16.7 43.0
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Morgan Stanley
Notes
1. Based on unaffected closing price of $18.01 on 7/23/01
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Project West
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Exchanged Ratio Has Appreciated Over the Last Month
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o When one
considers the 0.26x
exchange ratio for
the stock offer,
this exchange ratio
also represents a
reasonable premium
to current and [Graph of Exchange Ratio Since IPO -- From
recent historical 11/25/97 to 10/08/01]
exchange ratios:
o As of 10/8/01:
30.0%
o 3 month average:
52.9%
o 6 month average:
52.9%
Morgan Stanley