Brad Jacobs set out to do the impossible: Acquire 17 companies within a compressed time period and integrate them into a synergistic logistics enterprise. In the end, it proved impossible even for an executive with Jacobs’ chops to pull off.
Tuesday’s announcement that XPO Logistics Inc. (NYSE: XPO), the company that Jacobs founded 11 years ago, plans to shed everything except its North American LTL business was a nod to the impossible. Those who question that notion should ask why, after four years of dealmaking and five more years of gestation, would the company embark on what has become a two-year odyssey to break itself up?
Jacobs’ strategy of buying scale worked in the solid waste and equipment rental fields, where he made separate fortunes before starting XPO in 2011. However, those are industries with local footprints. XPO was a global supply chain operation, with all the complexities that accompany it. Jacobs may have underestimated the challenge of melding a melange of assets at such a rapid clip and then integrating them into a highly functional business operating across an intercontinental network. Jacobs may also have thought he could buck the industry’s dismal M&A track record, where for every successful large-scale acquisition and integration there are many that have crashed and burned. So-called tuck-in deals, in which a large company buys a smaller one to bolt on to the buyer’s very specific capabilities, are generally more cost-effective because the downside risk is limited.
No one knows if Jacobs and XPO’s board ever reached a point when they realized that the multiple properties they had accumulated, while solid assets in their own right, were not cut out to be spokes in a unified hub. The cross-selling potential never materialized, a point that Jacobs himself raised in January 2020 when XPO announced that it would explore strategic alternatives to sell or spin off its assets. (The initiative was tabled when the COVID-19 pandemic hit the U.S.) It was difficult to market a broad range of capabilities when there was little common ground among the businesses offering them.
Bridging the cultural divides also became a challenge, especially after XPO in 2015 acquired French transport and logistics giant Norbert Dentressange S.A. and thrust Jacobs and the company into a different world of labor relations and regulations than they were used to.
The dealmaking stopped in September 2015 after XPO acquired trucking and logistics firm Con-way Inc. At the time, Jacobs said the company needed to absorb and integrate Con-way into the rest of the operation. Jacobs vowed to return to the M&A field at some point, but it never happened. Instead, the company headed in the other direction.
Mission accomplished
However, it would be way off-base to claim that Jacobs, who never fancied himself an empire builder, hasn’t accomplished his primary mission, which has been to build substantial wealth for XPO’s shareholders. According to Bloomberg Market Data, XPO was the seventh-best performing stock among listed Fortune 500 companies during the past decade. The August 2021 spinoff of its logistics business, now known as GXO Logistics Inc. (NYSE: GXO), created even more shareholder value. The plan announced Tuesday to spin off its high-performing truck brokerage and final-mile businesses, along with managed transportation and freight forwarding, could boost XPO’s share price by 50% over Tuesday’s closing price of a little more than $60 a share, according to estimates from Deutsche Bank.
The proceeds from XPO’s proposed sale of its $1.1 billion North American intermodal business, along with the sale or listing of its $3.1 billion European business, could help reduce the company’s net debt to 1 times earnings before interest, taxes, depreciation and taxes from 2.7 times EBITDA, a dramatic deleveraging that would enable the company to meet a key goal of attaining investment-grade status.
Tuesday’s news of the spinoff and divestitures was greeted warmly by analysts, several of whom set 12-month price targets in the triple-digit range of between $107 and $120 a share, well above Tuesday’s closing price of just above $60. The moves were also hailed by investors, which bid up XPO’s shares by more than 13% to $70.07 a share on Wednesday.
Some have chalked up XPO’s decision to keep its North American LTL business to Jacobs’ hubris in believing it can compete with vaunted public carriers like Old Dominion Freight Line Inc. (NASDAQ: ODFL) and Saia Inc., (NASDAQ: SAIA) as well as an assortment of strong privately held carriers. Others see it as a prescient move, however. Whether it be available land, trucks or drivers, LTL assets are in short supply. In particular, real estate needed for terminal expansion has become very difficult to find. This puts a comfortable floor under the valuation of an LTL landowner like XPO.
The segment’s capacity capabilities are straining mightily against continued demand. XPO’s expected first-quarter operating ratio — a ratio of expenses to revenue — of 86% is due largely to its continued, though lessened, dependence on pricey purchased transportation to move goods that can’t be handled in-house, according to a person familiar with the situation. The company has said it is actively addressing the issue by hiring hundreds of drivers and by building equipment.
Though XPO’s LTL business doesn’t operate nearly as efficiently as Old Dominion, which is on track to post an astounding first-quarter operating ratio of 73%, it still generates an adequate 14% profit margin, the source said.
(An earlier version erroneously said that Jacobs started XPO in 2021.)