Acquisition strategy thrown under the truck (Photo: Jim Allen/FreightWaves)
The head of transport and logistics giant XPO Logistics, Inc. (NYSE: XPO) today ruled out any acquisitions for the foreseeable future, saying that repurchasing the company’s shares at currently depressed prices is a more effective use of its capital.
Merger and acquisition activity is a “much, much lower priority for us,” Brad Jacobs said in an interview with FreightWaves after the Greenwich, Conn.-based concern reported fourth-quarter and full-year 2018 results. XPO came very close to making an acquisition near the end of 2018, Jacobs said. However, a mid-December plunge in its share price following a very bearish report from an investment firm triggered a change in strategy, Jacobs said. After running the numbers, Jacobs said it was “an easy call” to determine that stock buybacks were a more efficient way of deploying capital.
XPO would still be pursuing M&A opportunities had shares remained at much higher levels, Jacobs said.
Yesterday, the company’s board authorized a repurchase of up to $1.5 billion of outstanding shares. The move comes less than two weeks after XPO completed a $1 billion stock repurchase authorized in mid-December followed the share price dive. Even though the board’s action doesn’t formally commit the company to proceed with the latest buyback, Jacobs said it expects to do so. About 18 million shares were retired in the earlier buyback, XPO said. XPO has nearly 127 million shares outstanding, according to data from Barchart.
XPO shares traded as high as $116 a share in late September, but had already begun retreating from that peak when on Dec. 12, Spruce Point Capital Management issued a scathing report attacking XPO’s accounting practices and managerial competence. The stock tanked more than $15 in one day, eventually settling several days later at a low of about $41 a share. It has since recovered to trade in the high $50s.
News about tabled M&A activity may disappoint shareholders who, based on comments Jacobs made in late 2017, anticipated that XPO would have made one and maybe two acquisitions last year. XPO, which came out of nowhere to become a $17 billion company largely through an unprecedented four-year spree of 17 acquisitions, has been on the sidelines since September 2015 when it acquired Con-way Inc. for $3 billion.
Judging by the market’s after-hours reaction to XPO’s quarterly and full-year results, a buyback will deliver far more bang for the buck than it did 24 hours ago. Shares fell sharply after XPO reported that it fell short of its original fourth-quarter projections for earnings before interest, taxes, depreciation and amortization (EBITDA). Quarterly operating income for the transportation and logistics segments fell by $25 million and $10 million, respectively, over-year-earlier figures.
Jacobs blamed most of the shortfall on the loss of U.S. “postal injection” business from its largest customer, whom Jacobs wouldn’t identify. Weakness in the U.K. and France also hurt results, the company said.
The large customer decided to in-source the moves from fulfillment centers to destination post offices for final deliveries, business it had long contracted to XPO, Jacobs said. XPO knew that the change was coming, but couldn’t predict when it would happen. “It kind of wrecked our quarter,” Jacobs acknowledged.
XPO is likely to limp along through the first half of the year because the same customer will be substantially reducing its business with the company in other product lines. Results are likely to improve during the second half as more business comes on stream to replace the revenue, said Jacobs, who called the recent events a “blip.” The large customer will remain in the top five of XPO’s largest customers, Jacobs said.
The company predicted 6 to 10 percent adjusted EBITDA growth for 2019, a range that factors in the impact of the lost business and continued weakness in the U.K. and Europe.