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The XPO-GXO spinoff saga: `See you at the crossroads’

Is divesting brokerage, final-mile and intermodal operations the key to boosting XPO’s post-spin valuation?

When you get to that fork in the road... (Photo: Jim Allen/FreightWaves)

Brad Jacobs hasn’t been denied much during what has been one of the most accomplished business careers of the past 40 years. What Jacobs has wanted, he’s taken, judging by his founding of five billion-dollar businesses, three of which became very successful publicly traded companies.

Yet what has eluded Jacobs in the 10 years since he founded XPO Logistics Inc. (NYSE:XPO), one of those billion-dollar babies, is having his company mentioned in the same breath as Old Dominion Freight Line Inc. (NASDAQ: ODFL), Saia Inc. (NASDAQ:SAIA) and C.H. Robinson Worldwide Inc. (NASDAQ:CHRW).

All three trade at higher valuations than XPO, and all play in XPO’s sandbox. Robinson is the nation’s largest freight broker. LTL carriers Old Dominion and Saia have truckload brokerage businesses, but they are too small to move the needles at either company. Jacobs, by contrast, maintained robust brokerage and LTL operations at XPO, and both are thriving.

At 9:30 a.m. Eastern time on Monday, one day shy of his 65th birthday, Jacobs will ring the bell at the New York Stock Exchange to signal the start of trading in GXO Logistics Inc. (NYSE:GXO), XPO’s one-time logistics business that has been spun off to shareholders.

Once he takes his hand off the ringer, Jacobs will, as chairman and CEO, run a “pure-play” transportation company and leave the contract logistics operation in the hands of a separate public enterprise. He will also need to convince Wall Street that the XPO that remains should be accorded an equal if not superior valuation to rivals that have been more richly rewarded in part for presenting investors and analysts with a simpler road map than the old XPO.

The pre-spin XPO was routinely accorded high-single-digit to low-single-digit multiples to earnings before interest, taxes, depreciation and amortization (EBITDA). Old Dominion’s, Saia’s and Robinson’s multiples were typically higher. For example, Old Dominion and Saia shares trade today at 20 and 15.6 times their respective 2021 EBITDA. 

Jacobs’ message for several years is that XPO has been penalized with a multiple-compressing “conglomerate’s discount” because the company had too many moving parts for investors to appropriately and accurately value. By separating the two businesses into stand-alone, simpler-to-understand models, Jacobs believes the strategy will help the post-spin XPO escape the penalty box.

It promises to be an interesting ride. GXO, which Jacobs will chair but not run day to day, will hold an investment-grade credit rating from the start. GXO will become the world’s largest pure-play contract logistics company, though in reality its rivals in the narrow space are small companies. Big contract logistics providers like DHL Supply Chain are part of companies that offer other services. 

XPO will not come out of the gate with an investment-grade rating, although a company spokesman said it plans to reach that status soon after the spinoff. Acquisitions, which had been the centerpiece of the strategy that brought the company to this point, will take a way-in-the-back seat to deleveraging in order to meet the investment-grade criteria, Jacobs told analysts on Thursday, the day after XPO issued its final quarterly results as a combined entity. The results were stellar, with XPO setting quarterly records for revenue and EBITDA. XPO also raised full-year earnings estimates for the transport and logistics segments.

Amit Mehrotra, the longtime Deutsche Bank analyst whose propensity for raising inconvenient truths has earned the transport C-suites’ grudging respect and perhaps a slug of enmity, wondered on the call if XPO would still feel the weight of the conglomerate’s discount post-spin. Mehrotra asked Jacobs if shedding the brokerage and final-mile businesses — both of which are performing at high levels and would presumably fetch handsome sums if put on the market — might be the path to elevating XPO’s multiple to the level of pure-play LTL providers. 

Jacobs replied that XPO has no plans to divest the non-LTL businesses, and that it will not be weighed down by the dreaded “discount.” Jacobs preached patience and advised all concerned to look beyond the first two weeks or so of trading.

The spinoff also raises some intriguing scenarios. For one, there aren’t that many individuals chairing two large public companies. At GXO, will Jacobs function as a traditional hands-off chairman, or will he become more involved than expected in a business that he ran until now? The XPO spokesman said there are examples of executives holding dual chairmanship positions, citing Michael Dell, the multibillionaire who heads the boards of technology companies Dell Technologies Inc. (NYSE:DELL) and VMWare Inc. (NYSE:VMW).

There is the issue of cross-selling. Will an XPO account executive feel pressure to steer a customer to GXO if that customer wants contract logistics services? The ability to sell a broad transport and logistics portfolio was an important part of XPO’s value proposition through the latter part of the past decade. However, Jacobs has said in recent years that most of the cross-selling did not occur across the transportation and logistics businesses, but within the transportation portfolio where an LTL customer may also want final-mile and intermodal coverage. 

Jacobs will also be dealing with a Teamsters union that XPO held at bay for a decade but that recently secured its first two collective-bargaining agreements with the company. The union believes it has momentum to further organize at XPO, but in Jacobs it faces an implacable foe.

Successful spinoffs are not slam dunks to execute. Still, one needs to look very hard to find an analyst who will bet against Jacobs, if not the strategy. Jason H. Seidl of Cowen & Co. affirmed XPO as his “top pick” on Thursday following the second-quarter results and the subsequent analyst call. LTL is in a sweet macro spot, and XPO’s technology investments will bear much fruit in digitizing manual and inefficient processes, Seidl said.

Seidl was also encouraged by GXO’s “robust business pipeline,” adding that the company will not only continue to expand to a new customer base, but has the ability to grow business within its current customer base. The analyst has a 12-month price target of $169 a share on XPO shares. Shares on Friday closed down 1.6% to $138.69.

Todd Fowler, analyst at KeyBanc Capital Markets, said the spinoff should result in a “simplified reporting structure” and the “potential for better alignment among shareholders with respect to service offerings, end markets and geographic exposure. Fowler added that he expects “greater transparency around [the] assigned valuation for each business post the actual spin.” Yet the relative valuation of the combined company also remains attractive, he said. Fowler has a $175-a-share 12-month target, and has assigned an “overweight” rating to shares.

The headline of Fowler’s research note spoke volumes for what will transpire on Monday and for what lies ahead:  “See you at the crossroads.”

Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.