Beyond the Page: A Wall Street view of the Con-way buy

   Stifel Financial Corp.’s John Larkin is one of the few stock analysts who have not panned XPO’s $3 billion purchase of Con-way.
   In an interview, Larkin said that a lot of the negative sentiment about the deal got started by hedge funds who collaborated to take a short position—borrowing and then selling shares in hopes the price drops so they can repay the shares at the lower price—and then started working the sell-side analysts to convince them the deal is bad. Some negative ratings created a sell momentum, especially at institutions that have automated triggers to sell a stock if it goes down by a certain percentage.
   “I think it’s a pretty attractive entry point for people who believe Brad [Jacobs] is a capable strategist, understands how to consolidate industries. And he certainly has done a great job building a network of technology, a very good management team, and has raised all the capital he has needed reasonably effortlessly in a pretty choppy market.
   “They raised $1.26 billion of equity from sovereign wealth funds, and other funds, privately, without doing a big roadshow, and then they financed the rest of the Norbert Dentressangle deal with euro-denominated, high-yield bonds that have a 5.5 coupon. It wasn’t too long ago that secured bank debt had a 5.5 percent coupon. Here is unsecured, high-yield debt, 5.5 percent coupon for a company that’s never posted a positive earnings per share number.
   “That’s pretty extraordinary. People are willing to invest in this guy,” Larkin said.
   “So, I think the naysayers will be proven wrong over the long term. As Brad says, he’s here to build value over a five- to 10-year period, not five or 10 weeks.”
   XPO’s third quarter revenue of $2.4 billion exceeded Wall Street’s consensus estimate of $2.3 billion and its $166 million in operating profit was higher than the Street’s prediction of $139 million.
   Larkin points out in his research notes that until XPO settles into a steady state not dominated by takeovers it will be difficult to entirely determine how much earnings growth is due to operating performance.
   Stifel has a “buy” rating on XPO.