He came. He saw. He conquered. He stayed on for a while. He then left, making himself and his shareowners much richer than when he arrived.
If history is any guide, that will be Brad Jacobs’ arc at XPO Logistics Inc. (NYSE:XPO), the company he founded nearly a decade ago with a $150 million investment and grew into a $17 billion multinational behemoth that has been a massive wealth-builder for shareholders. Wednesday’s announcement that Greenwich, Connecticut-based XPO would split its multibillion-dollar transport and logistics units and spin off the logistics business to shareholders is an extraordinary move for the 64-year-old serial entrepreneur. But it should not surprise anyone familiar with Jacobs’ modus operandi, which has always centered on creating enormous value for shareholders.
Before XPO, Jacobs founded and ran four companies that turned into billion-dollar or multibillion-dollar businesses. Over a 10-year period from 1979 to 1989, Jacobs founded oil broker Amerex Oil Associates Inc. and U.K. oil trading firm Hamilton Resources Ltd. The latter two companies, United Waste Systems Inc. and United Rentals Inc., were built through scale-achieving acquisition strategies that would sound familiar to XPO-watchers. Both United Waste and United Rentals shares dramatically outperformed their equity indices during Jacobs’ tenure. United Waste was sold to Waste Management, Inc. in 1997 for $2.5 billion. United Rentals was sold in August 2007 to Cerberus Capital Management for $6.6 billion in cash and debt. By that time, Jacobs had relinquished the United Rentals CEO role but remained chairman.
Jacobs followed the same road map at XPO. The company’s acquisition and integration of 17 companies in five years was unprecedented in the industry’s long history. It is also a remarkable achievement in a sector where companies stumble over just one integration. The market rewarded XPO by making it the seventh-best-performing stock in the Fortune 500 during the past decade, according to data compiled by Bloomberg. Jacobs’ immense footprint was such that people forgot he was not a transport lifer and had no plans to be an empire-builder.
Should the pattern hold, Jacobs, who will be chairman and CEO of the transportation company — which goes by the placeholder name of XPORemainCo — will run it for two or three years. He will either then push for a sale of the transportation company, which includes XPO’s current less-than-truckload (LTL), brokerage, last-mile, intermodal and expedited transportation. (LTL and brokerage would account for 90% of the transport company’s profit). Or Jacobs will leave the CEO role in the hands of his successor, which could very well be current XPO President Troy Cooper. Cooper worked with Jacobs at United Waste and United Rentals Inc., and has been at XPO since the start. Cooper will become the president of XPORemain should the tax-free spinoff be consummated during the second half of 2021.
Jacobs will also serve as chairman of the new logistics company and own about 20% of its shares, though he is not expected to have management authority or responsibility. Jacobs currently owns about 18% of XPO’s shares, which on Thursday closed up more than 5.6% to an all-time high of $116.40 a share as investors reacted positively to Wednesday’s news.
If Jacobs departs, it will likely be a 2022 or 2023 story. But some analysts are already laying the groundwork. “While XPO’s stated plans are to have Mr. Jacobs run XPORemainCo, we cannot help but to wonder for how long?” said Jason H. Seidl, transport analyst at Cowen & Co., in a Wednesday note. Jacobs “has a long and storied history of being a very successful serial entrepreneur and has been at the helm of XPO since founding it in 2011,” Seidl said. “Hence, this may very well be the early start to his eventual exit strategy.” The analyst has an “outperform” rating on the shares with a revised price target of $148 a share.
Bascome Majors, analyst at Susquehanna Capital Group, said in a Thursday note that the spinoff plans pave the way for Jacobs’ eventual exit. However, unlike a plan announced last January — and scuttled in March due to the COVID-19 pandmeic — to sell all of XPO’s non-LTL businesses, the spinoff won’t bring in the cash to recapitalize XPO by buying out Jacobs’ approximately $2 billion equity stake, Majors said. Instead, Jacobs would likely “gradually recede” from running XPO, and sell down his stake over time, Majors said. Cooper is the “clear candidate” to run the transport company should Jacobs step down, the analyst said.
Majors has a $129 price target on XPO shares but said he is poised to raise his target to $150 per share and possibly higher if the split and spinoff elevates shareholder value as XPO hopes.
Jacobs’ possible departure is one of many questions as the industry and markets come to grips with XPO’s moves. Still unanswered is the status of key executives like CIO Mario Harik, who drives XPO’s $600 million-a-year IT budget and provides solutions to the total enterprise. Another question is how either of the new companies can capture the synergies that one integrated transport and logistics company was able to provide.
Evan Armstrong, president of logistics research and consultancy Armstrong & Associates, said he has pushed XPO to spin off or sell the LTL operation since it entered the segment in 2015 by buying Con-way Inc. for $3 billion. “In the U.S., LTL doesn’t fit in well strategically with the third-party logistics components of XPO where there are synergies in developing customer solutions. … The other operating entities have synergies between warehousing, domestic and international transportation management, and last-mile delivery which should be part of one integrated service offering,” Armstrong said.
Armstrong said he was puzzled that the last-mile unit would remain a part of the transportation company. “It’s strange having the last mile separated from the warehousing operations since that’s where the e-commerce fulfillment is being provided,” he said.
The conglomerate discount
The goal behind the multiple acquisitions and integrations was to build a broad portfolio of supply chain solutions for the world’s biggest companies. But while XPO has been successful in executing on that model, the company has struggled to convince investors and analysts that the company should be valued much higher than it is.
XPO currently trades at a 2021 multiple of 10 times earnings before interest, taxes, depreciation and amortization (EBITDA). Its valuation, Jacobs has argued, is well below more pure-play providers like Old Dominion Freight Line Inc. (NASDAQ:ODFL) and Saia Inc. (NASDAQ:SAIA) in LTL, C.H. Robinson Worldwide Inc. (NASDAQ:CHRW) in brokerage, and Swiss firm Kuehne + Nagel and Danish firm DSV in global logistics. Old Dominion, considered the gold standard of LTL carriers, trades at more than 17 times 2021 EBITDA, while Saia trades at 12.3 times, according to estimates by Deutsche Bank.
XPO shares would be 50% higher if they traded in line with its peers, Jacobs said in an interview Wednesday night on CNBC.
Jacobs has said repeatedly that XPO is penalized because its many moving parts make it hard for analysts and investors to gauge its true worth. During his CNBC interview with Mad Money host Jim Cramer, Jacobs acknowledged that the company is “trapped inside a conglomerate structure,” and that the goal of the spinoff is to simplify what has been a complex business. Few analysts disagree with that assessment. Nor do they argue with Jacobs’ end game. “The spinoff should create two companies with clear business lines and easier public market comps” for investors to digest, Seidl said.
Amit Mehrotra, Deutsche Bank’s lead transport analyst, said XPO shares should trade around $150 a share if the market revalues the transport company between Saia’s and Old Dominion’s valuations, and assigns a 10- to 13-times-EBITDA valuation to the logistics spinoff. The valuation of the logistics unit would reflect the benefits of an asset-light business model, established recurring revenue streams, and bullish secular trends in e-commerce and omnichannel retailing that would generate demand for the new company’s 800 contract logistics facilities, according to Mehrotra.
Mehrotra cautioned, however, that there is “significant uncertainty around how the market will perceive the outlook for each business,” especially if both companies still trade post-spinoff at the current 10 times EBITDA multiple. He also noted uncertainties surrounding the relatively long wait for the spinoff to take place, and management’s own disclaimer that there is no guarantee a spinoff will occur.
Mehrotra remains bullish on XPO shares regardless of whether or not “strategic action” is taken to boost valuation metrics.