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FedEx to Buy Parcel Direct for $120M

FedEx Corp. announced an agreement yesterday to acquire Parcel Direct, a leading parcel consolidator and division of Quad/Graphics, New Berlin, WI, for $120 million in cash.

The move marks FedEx's entry into the emerging parcel consolidation market and will let it deliver low-weight, less time-sensitive goods to residential customers. The deal is to close in the second fiscal quarter, which ends Nov. 30.

Parcel Direct will become a subsidiary of FedEx Ground, the shipping giant's trucking company. It will target customers in the e-tail and catalog industries. Parcel Direct has 450 employees and generated $130 million worth of net revenue in 2003, so the acquisition is not expected to have a material effect on FedEx's fiscal 2005 financial results.

Parcel Direct developed a successful model for parcel consolidation tailored to the needs of targeted high-volume shippers, said FedEx, Memphis, TN. The model is based on a network designed to take advantage of the U.S. Postal Service's Parcel Select service, a wholesale ground package pricing program used by package consolidators and others. With Parcel Select, companies enter packages deep into the mail stream and receive reduced rates because delivery zones are skipped.

Thousands of packages are transported daily from customers' facilities to one of 12 Parcel Direct sorting locations nationwide. Packages are sorted and consolidated at these locations and transported to local post offices for delivery to residential customers. Packages are delivered from businesses to consumers in two to six days with Parcel Direct, as opposed to one to five days with FedEx Home Delivery.

“Our customers are coming to us and saying, 'Hey, we're willing to trade service and transit times if indeed we can really get a lower-cost option,'” said Bram Johnson, executive vice president, FedEx Ground. “As customers begin to buy lower-cost items more often, transportation becomes a greater piece of that total delivery cost.”

Prices for Parcel Direct services on average would equal FedEx's standard ground services, minus the surcharge, “or somewhere in that neighborhood,” Johnson said.

“We now have a service that we can trade off price and transit time, along with FedEx Express domestic residential services and FedEx Home Delivery,” he said. “We can offer a portfolio that we can bundle together and offer one residential solution to our customers.”

An analyst covering the transportation industry said the acquisition follows a trend in which three major private carriers — FedEx, United Parcel Service and DHL — are moving to become full-service players.

“The major private carriers today are trying to offer a broad range of services to customers both internationally and domestically,” said Satish Jindel, a transportation consultant at SJ Consulting Group, Pittsburgh.

Also, the work-share discounts offered by the USPS have “created a need for these carriers to form relationships with companies like Parcel Direct or R.R. Donnelley, and many are finding that buying is a quicker and more efficient way to do this rather than building,” Jindel said.

Doug Caldwell, a vice president at AFMS Transportation Management Group, a consultancy in Portland, OR, said Parcel Select “is going to be a real nice complement, specifically to FedEx Home Delivery. Rather than build out their own Parcel Direct network, they are buying an existing network, along with a whole set of clients that go along with that.”

The acquisition is FedEx's second since December. The company completed its $2.4 billion purchase of Kinko's Inc. in February, putting FedEx operations in Kinko's 1,100 stores nationwide and giving the shipping company better access to the small-office/home-office market.

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