Leaseway Transportation Corp.
Leaseway Transportation Corp.
3700 Park East Drive
Beachwood, Ohio 44122
Fax: (216) 765-5077
Sales: $600 million
Stock Exchanges: NASDAQ
SICs: 4213 Trucking Except Local
Leaseway Transportation Corp. is a group of companies that provide physical distribution services to manufacturers, distributors, and retailers in the United States and Canada. Based in a suburb of Cleveland, Ohio, the firm evolved from a turn-of-the-century cartage service into a billion-dollar interstate trucking concern. A heavily leveraged buyout in late 1980s took the company private, brought on a massive debt load, and forced the company into Chapter 11 bankruptcy, from which it emerged in 1993.
Leaseway was founded around the turn of the twentieth century by Hugh O’Neill, who began distributing newspapers and other goods with a horse-drawn wagon. In 1912 O’Neill started the transition from “horse power” to “horsepower” and appropriately named his rapidly changing firm the Hugh O’Neill Auto Co. When the company won a contract to deliver a major local newspaper in 1921, O’Neill again renamed the business, this time to Superior Transfer. The second generation of O’Neills, brothers Francis and William, joined the company in the late 1920s. William has been credited with the development of long-term, all-inclusive leases combining vehicles, drivers, maintenance, and, later, logistical expertise. As contract carriers, O’Neill affiliates often sublimated their own corporate identities to suit customer needs. Since the 1930s, contract carriage has comprised the vast majority of the group’s business.
At that time, the fledgling trucking industry was intensely competitive, with some truckers charging rates that were not sufficient to defray their operating costs. They forewent maintenance on their vehicles and drove long hours to compensate for the low prices. In 1935 the Federal Motor Carrier Act was ratified to bring stability to the motor carrier industry by setting rates and load limits. It also helped to establish the parameters of Leaseway’s growth and expansion.
The new legislation limited individual trucking companies to eight contract customers, but the O’Neills (along with many other transport concerns) circumvented this rule by acquiring and creating separate firms. Each individual O’Neill affiliate could have eight contract clients. One of these subsidiaries, however, Anchor Motor Freight, Inc., sufficed with one: General Motors. The company’s relationship with GM began in 1934 and evolved into the core of Leaseway’s contract carrier trade. The family business grew rapidly over the next twenty-five years, with contracts to haul goods for such major manufacturers as Sears, Roebuck & Co., Whirlpool Corp., Montgomery Ward, and Standard Oil of Ohio.
After World War II, the field of transportation leasing grew rapidly. As many manufacturers decentralized, they looked increasingly to inter- and intra-state trucking to connect their activities; at the same time, the federal interstate highway system was being constructed and expanded. The O’Neills, led by Francis and William, embarked on an ambitious acquisition program. By the late 1950s, the family owned over 100 separate companies, and its annual revenues neared $20 million.
The O’Neill brothers took their family business public in 1960 as Leaseway Transportation Corp., with an initial capitalization of $2.25 million. Family members and close associates owned 90 percent of the company’s stock during the early 1960s, a proportion that would steadily decline over the next two decades. In 1961 the new firm acquired 79 of the O’Neill affiliates and three years later it added 15 more of the family’s properties (including Anchor Motor Freight, which contributed one-fifth of the corporation’s annual revenues at its inclusion). As Chair and CEO, William O’Neill led Leaseway’s dramatic growth from $25 million in annual revenues in 1961 to $475 million by the time he retired in 1975, acquiring 19 companies during that period. He also expanded leasing activities into Canada and Europe through several joint ventures. Leaseway earned a spot on the New York Stock Exchange in 1966. Within less than a decade of its incorporation, Leaseway had grown to rank second only to Consolidated Freightways among trucking firms. In 1975 William O’Neill was succeeded by his nephew Hugh O’Neill.
Just three years later, Hugh O’Neill resigned and was replaced by Robert A. Burgin, Jr. Although Leaseway’s revenues had continued to rise during the last O’Neill’s tenure, the competition grew even faster: by 1979, Leaseway ranked fourth among the largest highway transportation companies in the United States, after United Parcel Service, Consolidated Freightways, and Roadway Express. According to 1982 coverage in the Plain Dealer, Burgin was brought on to consolidate the 195 transportation-related companies that made up Leaseway in anticipation of the deregulation of the trucking industry that would occur during the early 1980s. O’Neill retained his seat on Leaseway’s board of directors and remained a major stockholder.
Years of intense lobbying on the part of the trucking industry combined with the free-market ideals of the presidential administration under Ronald Reagan led to the 1980 repeal of many Interstate Commerce Commission rules governing shipping rates, the number of customers a given company could serve, and the size of individual loads. Although deregulation was hailed as a boon to Leaseway and the entire industry, rate cutting and other aggressive competitive measures, along with a recession in the early 1980s, sharply reduced profits. Leaseway consolidated many of its divisions around its two primary auto transport subsidiaries, Anchor Motor Freight and Leaseway Motorcar Transportation.
Deregulation also prompted Leaseway to hire marketing specialists and embark on an advertising campaign. The company also developed a multi-million dollar computer system called Route Assist, which analyzed orders, loads, destinations, and mileages, to develop more efficient transport strategies for all its customers. A satellite system was added at the end of the decade to help accommodate customers who required “just-in-time” deliveries.
In 1982 the firm launched a new subsidiary, Leaseway Express Inc., as a “less-than-truckload” common carrier. Based in Cincinnati, the non-union firm attempted to make what was traditionally an unprofitable segment of the industry pay off. The new venture boasted a greatly simplified rate structure based strictly on distance, rather than on an aggregation of rates based on formulas of distance, type of shipment, weight, and other considerations. Leaseway Express initially operated only in New York, Cleveland, Chicago, Philadelphia, Dallas-Ft. Worth, and Cincinnati, but expanded service to four more terminals in the eastern United States the following year. In spite of the parent company’s high hopes for its new venture, Leaseway Express lost money in 1982 and 1983 and was sold to Thurston Motor Lines Inc. in 1985.
Leaseway’s other endeavors fared no better during the 1980s. Although annual revenues grew steadily—and surpassed the $1 billion mark in 1983—Leaseway’s profits declined from $45 million in 1981 and stayed low through 1984. Gerald C. McDonough, who had assumed the leadership of Leaseway in 1982, noted in the May 10, 1984, Plain Dealer that ” those of us in the secondary market positions are competing intensely with each other, but often, the net effect appears to be that we are swapping accounts in a market where demand has remained relatively flat.” Still, McDonough maintained that Leaseway would benefit and grow as the result of deregulation.
In 1984 the CEO announced staff cuts and a plan to sell businesses that did not achieve 16 percent return on equity. Accordingly, he divested Leaseway Fleet Management Corp. to Dart & Kraft Financial Corp. Although Leaseway’s profits jumped to more than $62 million in 1985, its stock continued to languish around the $30 mark, fueling stockholder discontent— especially among the O’Neills, who still controlled about 30 percent of the company’s shares.
In April 1986, a family coalition of shareholders, led by Patrick J. and Hugh O’Neill, launched a proxy fight against Chairman McDonough. The O’Neills reasoned to the Plain Dealer that ” the company hasn’t performed under him for four years, and consequently we feel the buck stops there.” They demanded McDonough’s resignation, and endorsed a slate of directors floated by the “Committee to Revitalize Leaseway Transportation Corp.” in the fast-approaching May board elections. McDonough, who enjoyed the support of the sitting board of directors, refused to step down. Although the two groups couldn’t come to a compromise, they both announced that they would try to sell Leaseway in the new fiscal year.
Within weeks, McDonough and the Leaseway board won the closely fought proxy battle with the support of 56 percent of all shareholders and an overwhelming majority of the non-O’Neill vote. The still-influential O’Neills pushed for the quick divestment of Leaseway to beat an impending capital gains tax increase. If the sale was closed before January 1, 1987, they would avoid the new tax; if not, the O’Neills stood to lose about $10 million to the U.S. government.
Six months after the proxy battle, 40 of Leaseway’s managers joined forces with Citicorp Capital Investors Ltd. to take the trucking firm private. Their $690 million leveraged buyout (LBO), which was announced in November 1986, offered shareholders $51 per share in cash, a slight premium over the going rate on the stock market. Complaining that the price was too low, the O’Neills and some other stockholders threatened to hold on to their shares. Finally, on December 24, the O’Neills sold 2.2 million shares (nearly all of their personal holdings) back to Leaseway for $48.12 per share to net well over $100 million. Regardless of the O’Neills’ protests regarding the buyout offer, the LBO was later characterized as “so over priced that it was doomed from the start,” by Phyllis Berman of Forbes magazine. She noted that “only one month after the ink was dry on the leveraged buyout documents (July 1987), Lease-way failed to make its initial projections.”
Even in the high-leverage trucking business and the freewheeling 1980s, Leaseway’s buyout was universally denounced as over-leveraged. About $200 million of the $690 million buyout was generated through the sale of 13.25 percent unsecured bonds. Another $400 million was loaned by banks, led by the First National Bank of Boston. Citicorp Capital Investors raised the remaining equity. A recession that hit the auto industry especially hard during the late 1980s had devastating repercussions for Leaseway.
Asset sales, drastic reductions in capital spending, and a change in leadership did nothing to reverse Leaseway’s declining fortunes. In 1988 Gerald McDonough turned the positions of Chair and CEO over to Richard A. Damsel, a former senior vice-president for finance and administration. Within a few months, Leaseway divested its Full-Service Leasing division, a significant portion of its contract and warehouse operations, and its Bulk Materials Group. Together, these represented $429 million, or one-third of its 1987 revenues. CEO Damsel made several unsuccessful attempts to wheedle lower interest rates out of bondholders, as Standard & Poor’s relegated the debentures to “junk bond “status.
Leaseway was able to pay interest charges of $5 million per month throughout 1988 and 1989, but recorded successive losses of $46 million in the former year, and $18 million in the latter. Corporate leaders blamed excess capacity in its auto hauling and bulk truckload operations, as well as increased competitive pressures in its retail home delivery operations for the negative performance. Unfortunately, Leaseway had taken on its huge debt load at the same time that its two most important customers, General Motors Corp. and Sears, Roebuck & Co. (which together constituted about half of the shipper’s business) were downsizing. Other clients, too, grew skittish: early in 1990, Ford Motor Co. pulled some of its business. CEO Damsel later acknowledged that Leaseway’s image as a “troubled LBO” impeded the acquisition of new customers as well. This sluggish demand idled as much as 30 percent of Lease-way’s fleet.
In February 1990, Leaseway missed a $12.75 million interest payment on its junk bonds. That October, amid continuing negotiations with its creditors, the company stopped paying on its remaining $140 million bank debt as well. In January 1991, Leaseway stopped paying interest to its senior lenders. Skipping its debt payments did not help Leaseway’s bottom line, however: from January 1, 1990, through December 31, 1992, the firm lost a total of $253.8 million. Damsel staved off bankruptcy with on-again, off-again negotiations for years, until December 1992, when the company filed for protection from its creditors under Chapter 11.
Meanwhile, takeover artists like Carl Icahn were buying up the company’s debt at rates as low as ten cents on the dollar. Icahn was one of five investors who owned about 80 percent of the company’s unsecured debt by late 1992. The financier (who alone held 40 percent of the bonds) was later credited with bringing his fellow bondholders to the bargaining table. Icahn sold his bonds (for a reported profit of $35 to $45 million) before the restructuring was completed, but after it became apparent that the debt would be transformed into an equity position in Leaseway.
The reorganization only took ten months—after years of wrangling over the debt, both sides appeared ready to deal. The agreement rid Leaseway of $471.3 million in long-term debt and accrued interest by transferring substantially all of the company’s stock to bondholders. The reorganized Leaseway was much smaller than the company that was taken private in 1986: its annual revenues had declined by more than half, from nearly $1.5 billion to $628 million. By its own admission, the firm’s long-standing financial difficulties had reduced capital equipment expenditures, with the result that, on the average, its fleet was past “the mid-point of its expected useful life.”
In spite of formidable challenges, Leaseway had strengths that gave its executives and employees reason to celebrate the company’s emergence from bankruptcy with a barbecue at corporate headquarters. The firm’s relationship with General Motors had remained intact for more than six decades, and the American auto industry was on an upswing, which could contribute to improving Leaseway’s fortunes. In his last annual report—and Leaseway’s “first”—CEO Damsel added “our reputation as a high-quality carrier, our industry expertise, our marketing strategy, and our improved financial condition” to the list of the company’s strengths.
Late in 1994, Damsel announced that he would be resigning from Leaseway’s chair and chief executive office. Darius W. Gaskins, Jr., a Leaseway board member, replaced Damsel as chairman in December 1994. Then, in March of the following year, Leaseway and Penske Truck Leasing Co., L.P. announced a merger agreement under which Leaseway would be acquired for around $200 million by Penske subsidiary Penske Dedicated Logistics Corp. The merger was expected to be complete later that year.
Anchor Motor Freight, Inc.; Appliance Transportation, Inc.; Atlas Service Co.; Automotive Transportation Systems, Inc.; Bejin Trucking Company; Better Home Deliveries, Inc.; Black Horse Carriers, Inc.; Charlton Transport (Quebec) Limited Consolidation Centers, Inc.; Custom Deliveries, Inc.; Dedicated Freight Systems, Inc.; Geo. McNeil Teaming Company; Gold Star Enterprises, Inc.; Gold Star, Inc.; Gross & Hecht Trucking, Inc.; Inter-City Trucking Service, Inc.; Leaseway Customized Transport, Inc.; Leaseway Deliveries, Inc.; Leaseway Finance Corp.; Leaseway Ltd.; Lease-way Motorcar Transport Company; Leaseway Multi-Transportation Services, Inc.; Leaseway National Service Corp.; Leaseway Personnel Corp.; Leaseway Purchasing Corp.; Lease-way Technology Corp.; Leaseway Transfer Pool, Inc.; Lease-way Trucking, Inc.; Logistics Partners Company; Logistics Resource, Inc.; Middlesex Leasing Corp.; Mountainside Transport, Inc.; Nu-Car Carriers, Inc.; Quest Partners Company; Savannah Service, Inc.; Signal Delivery Service, Inc.; Somerset Driver Corp.; Stam-Win, Inc.; Strategic Transportation, Inc.; TRM Transportation, Inc.; Terminal Personnel, Inc.; Transco Group, Inc.; Transco Service-Oakland, Inc.; Transco Service-Sacramento, Inc.; Transportation House, Inc.; Trident Export Corporation.
Herman, Phyllis, “Staying Alive,” Forbes, Vol. 147, June 24, 1991, p. 45.
Bryan, John E., “Horses to Horsepower, O’Neills Offer Transportation for Globe,” Plain Dealer, December 20, 1965.
Cobleigh, Ira U., “Leaseway Transportation,” Commercial and Financial Chronicle, Vol. 208, November 14, 1968, p. 1949.
Gerdel, Thomas W., “Crushing Debt Load Proves Major Burden to Leaseway,” Plain Dealer, December 31, 1989, p. ID.
_____, “Leaseway Files for Reorganization,” Plain Dealer, December 2, 1992, p. 1C.
_____, “Leaseway Back from Chapter 11,” Plain Dealer, September 15, 1993, p. IE.
_____, “Chief of Trucking Company Stepping Down,” Plain Dealer, December 20, 1994, p. 5C.
Gleisser, Marcus, “O’Neills Began in Transportation,” Plain Dealer, April 24, 1986, pp. 1–2E.
Kelly, Michael, “O’Neill Resigns from Leaseway,” Plain Dealer, January 12, 1978, p. 6D.
Mahoney, Mike, “Battle Looms for Leaseway Control,” Plain Dealer, April 24, 1986, pp. 1–2E
_____, “Leaseway on Rocky Road; Experts Wonder if Earnings Will Improve,” Plain Dealer, April 25, 1986, pp. 10–11C.
_____, “Leaseway Transportation Sold; O’Neills Will Hold Shares for Now,” Plain Dealer, November 14, 1986, p. 1A.
Pallatto, John, “Leaseway Program Keeps Trucks on the Move,” PC Week, Vol. 3, September 9, 1986, p. 41.
Thomas, Dana L., “Over the Hump: After Some Rough Going, the Trucking Industry Is Picking up Speed,” Barron’s, Vol. 44, June 8, 1964, pp. 3, 12, 14, 15–16.
“Trucker’s Progress,” Forbes, Vol. 102, November 15, 1968, p. 47.
—April Dougal Gasbarre