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UPS, the Internet play
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July 22, 1999: 7:41 p.m. ET
Analysts see Big Brown's IPO as a way to enhance its e-commerce edge
By Staff writer M. Corey Goldman
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NEW YORK (CNNfn) - Analysts and investors were licking their chops on Wall Street Thursday after United Parcel Service Inc., the world's biggest package-deliverer, took the wraps off a proposed public offering.
Salivating just as much, if not more, were Wall Street's e-commerce set - those guys and gals who diligently monitor companies that hawk their wares to a mushrooming number of e-shoppers.
The reason: because UPS is already the hands-down winner when it comes to shipping goods efficiently, inexpensively and not necessarily overnight - which is exactly what 99 percent of companies who do business on the Net need.
Now, with its plans to raise as much as $5 billion in an initial public offering - money which UPS can use to buy up smaller companies and seek out new e-commerce strategies, UPS is well positioned to be the dominant delivery machine for all the clothes, flowers, books, toys and other goodies people will buy over the Net.
Forming strategic partnerships
"In terms of volume, they clearly have the time-deferred, small-package market cornered," said Alex Brand, an analyst with Scott & Stringfellow Inc. in Richmond, Virginia. "Going public will allow them to form partnerships with other e-commerce players through an equity investment rather than buying them outright with cash."
Unlike other shippers such as FDX Corp. (FDX)'s Federal Express, UPS has already been cashing in on what's known in the biz as time-deferred shipments - packages that don't have to be where they're going within a day. Fedex has cornered the market on overnight letters and packages, but many online retailers have embraced UPS because the goods they're sending aren't necessarily needed right away.
Indeed, UPS President James Kelly told CNNfn.com Thursday that part of the reason for the IPO "was to allow UPS to make strategic acquisitions and alliances that will allow the business to grow even more.
"Electronic commerce, for us, is not only having the ability to ship but also creating the opportunity for our customers to have better access to tracking and other online functions that are part of a bigger package," he said. "We see an even greater opportunity to work on electronic commerce between businesses, which the IPO will allow us to do."
More flexibility
How? The way Kelly explains it, having stock rather than cash will allow the company more flexibility in making acquisitions and forging partnerships than just cash alone.
"The reason we want that is to have an alternative to cash. In some cases it's better to use stock to fund an acquisition or map out an agreement," he said. "What we intend to do with the funds from the IPO is a tender offer to buy back some our shares. We're hoping that in effect it will be a wash, where we end up with the same amount of cash on hand as we have right now."
And that's a lot of cash. UPS currently has $3.6 billion of cash on hand. A conservative estimate of an IPO price of $70 a share would generate an additional $3 billion to $5 billion dollars for the company, according to analysts' estimates, making UPS the biggest IPO in history.
The two largest public offerings were Conoco Inc. (COC), which raised $3.96 billion in October 1998, and Goldman Sachs Group Inc. (GS)earlier this year, which raised $2.93 billion, according to Thomson Financial Securities. Delphi Automotive (DPH) also made the roster as one of the largest IPOs, raising $1.7 billion.
The other benefit to UPS's public offering is that it will allow the company to reward its employees - an increasingly popular way for businesses to retain key people as they expand.
Not a delivery boy salary
Take Kelly, for example. After starting his career at Big Brown as a delivery boy in 1964, the chief executive currently holds approximately 200,000 UPS shares, according to documents filed with the SEC. If the IPO is priced at the $70-mark being thrown about by analysts, that would boost Kelly's net worth by roughly $14 million. Kelly also has voting rights on an additional 22 million shares, which are in place for various UPS-sponsored charitable foundations.
Similarly, other employees who hold stock in their company would benefit from an IPO - and have a vehicle to cash out with should they decide to without having to sell their shares back to the company. Currently UPS's shares are worth $47 apiece, according to the company. There are currently between 560 and 570 million shares in the hands of 125,000 of the company's 350,000 employees.
That's what UPS values its own stock at. What Wall Street ultimately values the 10 percent of the company that will eventually make its way into shareholders' hands is a different story based on what Wall Street knows best - the financial performance of the company.
And that, according to UPS's second-quarter earnings statement, is quite formidable.
Stellar earnings
UPS Thursday delivered a 28 percent increase in second-quarter profits as demand for domestic shipments surged and international operating profits almost tripled.
Income for its quarter ended June 30 rose to $588 million, or $1.04 per diluted share, compared to $458 million, or 83 cents, in the same period a year ago. Revenues for the quarter rose 7.4 percent to $6.56 billion.
For the first six months, income rose 34 percent to $1.09 billion, or $1.92 a share, from $810 million, or $1.47 a share, in the first half of 1998.
UPS carried the equivalent of about six percent of the U.S. gross national product through its delivery system last year, and generated sales of $24.8 billion. Memphis-based FDX, by contrast, posted revenue of $16.7 billion for its fiscal year in May and has a current market value of about $14 billion.
UPS currently leads the U.S. Post Office as the biggest small package shipper, with about 2 million small deliveries a day compared to the Post Office's 1 million, according to the most recent figures compiled by Boston-based Forrester Research.
Too much hype
To be sure, some analysts think Big Brown may be a little ahead of its time.
"Right now, e-commerce retail is about 1.2 percent of the entire retail sales market, and computer connections in the majority of homes is still slow, which discourages growth," said Steve Lewins, an analyst with Gruntal & Co. in New York.
Until more people can order properly online, Lewins said, "this is a playing field that is wide open."
Others disagree. Stacie McCullough, an analyst with Forrester, said e-commerce transactions are already blossoming and are going to mushroom over the next two to three years.
Roughly $80 billion of goods was purchased online in 1998, according to Forrester, and that will blossom to $3.2 trillion by 2003.
McCullough does concede that a major issue for UPS, Fedex and other shippers is that they are losing money on business-to-customer deliveries - a problem they have yet to resolve.
However, UPS's IPO "could be a way for them to establish different partnerships to get the infrastructure they need to make money on those kinds of deliveries," she said.
Either way, "someone has to get all that stuff to where it's going," Brand said. "It's already mind-boggling what that company ships in a day and it's only going to get bigger." 
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