Fitch Places Con-way's Ratings on Rating Watch Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has placed the ratings of Con-way Inc. (CNW), including its 'BBB-' long-term Issuer Default Rating (IDR), on Rating Watch Negative. The rating action stems from yesterday's announcement that XPO Logistics, Inc. (XPO) will acquire CNW in an all-cash transaction. The rating action applies to a $325 million unsecured revolving credit facility and $725 million in senior unsecured notes. A full rating list follows at the end of this release.

KEY RATING DRIVERS

XPO will acquire CNW through a tender offer for all of CNW's shares at a price of $47.60 per share, a nearly 32% premium to CNW's closing price on Sept. 8, 2015. Including about $290 million of net debt at CNW, the enterprise value for the transaction equates to approximately $3 billion or about 5.5x CNW's last 12 months (LTM) EBITDA as of June 30, 2015 as calculated by Fitch. The acquisition combines XPO's global logistics operations with CNW's primarily asset-based less-than-truckload (LTL) and truckload (TL) operations, although XPO also views CNW's Menlo Worldwide Logistics (MWL) third-party logistics operation as a key piece of the acquisition. XPO estimates that various efficiency and revenue synergies will result in a $170 million to $210 million profit improvement at CNW, and including those synergies, the company estimates the transaction multiple would be below 4.3x.

XPO plans to fund the transaction using a combination of incremental borrowing and cash on hand. XPO has lined up $2 billion in committed financing to help fund the transaction. In addition, XPO has $1.2 billion in cash on hand and $415 million in ABL revolver capacity, while CNW also has about $424 million in cash on hand. As of June 30, 2015, CNW had $733 million in debt and capital leases on its balance sheet, while XPO had $3.8 billion of debt outstanding. Assuming that XPO utilizes the full $2 billion in available committed financing, Fitch estimates that the combined company will have about $6.5 billion in debt outstanding at closing.

Including transaction synergies, Fitch estimates that the combined company's pro forma EBITDA will be approximately $1.1 billion, leading to estimated pro forma EBITDA leverage at closing of about 5.9x, well above CNW's standalone leverage of 1.3x at June 30, 2015. XPO has stated that following the closing, it plans to de-lever to its net leverage target of 4.0x. Fitch views this level of leverage as well above a level that would be consistent with CNW's 'BBB-' IDR, particularly given the high level of cyclicality seen in the LTL and TL transportation sectors. Fitch will likely take a rating action at the time the transaction closes, which the companies estimate will occur in October 2015.

CNW has two sets of senior unsecured notes outstanding, comprised of $425 million in 7.25% notes due 2018 and $300 million in 6.7% debentures due 2034. The 7.25% notes have a change of control provision that will likely be triggered by the acquisition. If triggered, the provision will require the company to offer to repurchase the 7.25% notes at 101% the principal amount, plus accrued and unpaid interest. The 6.7% debentures do not have a change of control provision. Provisions in CNW's $325 million revolving credit agreement will also likely be triggered by a successful closing of the transaction that will result in an acceleration of agreement's maturity.

KEY ASSUMPTIONS

--The acquisition of CNW by XPO is completed as planned;

--Synergies of $170 million to $210 million are achieved;

--U.S. GDP growth of 2.2% in 2015 and 2.5% in 2016;

--CNW's standalone revenue grows modestly over the next several years, led by the benefits of general rate increases at CNW Freight and CNW Truckload, while MWL benefits from expanding services to existing customers and focused sales generation;

--Standalone margin gains are expected over the intermediate term as network optimization, LTL operating initiatives and lower driver turnover lead to efficiency benefits;

--Standalone free cash flow (FCF) strengthens despite somewhat higher capital spending related to ongoing fleet replenishment and growth in MWL's warehouse-management business.

RATING SENSITIVITIES

With the likelihood of a substantial leverage increase as a result of the acquisition by XPO, Fitch does not currently expect to take a positive action on CNW's ratings in the near to intermediate term.

On the other hand, completion of the acquisition by XPO according to the current terms will likely lead to a downgrade of CNW's ratings.

Fitch has placed the following ratings for Con-way on Rating Watch Negative:

--Long-term IDR 'BBB-';

--Senior unsecured revolving credit facility rating 'BBB-';

--Senior unsecured notes rating 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990635

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150910006593/en/

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Michael L. Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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