On January 15, XPO Logistics announced that it is exploring a possible spinoff of one or more business units, not including the North American LTL business, In other words, everything else is for sale – European Logistics, European Transportation, North American Logistics, and North American Transportation (with the exception of LTL). In announcing this plan, CEO Bradley Jacobs said, “We analyzed our business and decided a sale or spinoff of these four of our divisions could maximize shareholder value.” He indicated there was no timetable for completion or any guarantee of an end result. Jacobs further stated that XPO is suffering from a “conglomerate discount”. In other words, the firm is trading at well below the sum of its parts, and at a significant discount to some of what could be a streamlined company’s new peers. For example, XPO trades at 9.3 times EBITDA (Earnings before interest, taxes, depreciation and amortization), compared to Old Dominion at 13.5 times EBITDA, and Saia, C.H. Robinson, and Expeditors International at 10, 12.5, and 14.8, respectively. XPO’s non-LTL business trades at just 4.25 times EBITDA.
The announcement was received positively by the investing community. Share price increased 17% or $16 overnight. Amit Mehrotra, lead transport analyst for Deutsche Bank, speculated that the announcement could add $3.6 billion in shareholder value, or $32 per share. In a January 16 report, Stifel suggested there were strong prospects for most of the XPO portfolio. This is by no means a desperation move. According to Transport Topics, although revenue for the third quarter of 2019 dropped 4.4% from the same period last year to $41.5 billion, net income was $136 million, or 18% more than the same period last year. It does represent however, a significant change in strategy.
XPO is a top ten logistics service provider, operating 1535 locations in 35 countries. According to its 2018 Annual Report, it has over 100,000 employees and in excess of 50,000 customers. 2018 revenue was $17.2 billion, with a net income of $422 million. As of January 17, the market cap was $8.735 billion (current share price times the total number of shares outstanding.) XPO is a “full service” provider of transportation and other logistics services. 35% of its revenue comes from logistics, and 65% from transportation.
In 2011, Brad Jacobs, currently CEO acquired Express-1 Expedited Solutions, founded in 1989; and shortly thereafter, changed the firm’s name to XPO Logistics. Total revenues in 2011, were $117 million, with earnings of $759,000. The market cap on November 8, 2011, was $88.48 million. In his first letter to the shareholders, Jacobs outlined XPO’s goal of achieving “several billion dollars” of revenue over the “next several years”. The three-part strategy included a “plan to open new cold-start locations throughout the United States, primarily in truck brokerage. Second is acquisition. We plan to acquire good, non-asset-based logistics companies that are scalable. And third, we plan to aggressively grow our cold starts and acquisitions. We expect to do this by expanding our sales force, optimizing the way we do business, and harnessing best-in-class information technology to run our operations on an integrated platform.”
And Jacobs was true to his word. According to Bloomberg, since Jacobs took over, XPO has made 19 deals worth $7.5 billion. Share price has increased 584%. Among these acquisitions were Pacer (intermodal), New Breed (warehousing) and Norbert Dentressangle (contract logistics and transportation). In 2015, XPO purchased Con-Way Inc., then sold off the truckload division, keeping the LTL operation (which is not for sale). According to Freightwaves, the company is fulfilling the technology promise as well, spending a whopping $600 million annually for new and enhanced technology. In 2015, XPO took a deep breath and worked on implementation and consolidation, then in 2017, announced it had earmarked as much as $8 billion for new acquisitions. This plan changed however, and instead; the company began to focus on internal profit improvement. In December, 2018, the firm took a major hit when it lost its major customer. Although it has never been publicly identified, it was presumed to be Amazon and the loss cost XPO $600 million in revenue. Share price dropped 47% between October and January.
Now the stage is set for the next act of the XPO drama. Over the years, some firms have thought bigger is better, or diversification is better. XPO has tried it both ways. It will be interesting to see the results of this latest shift in strategy.