XPO Logistics (XPO 0.73%) has become one of the biggest logistics companies in the world through a dedicated roll-up strategy. But now, in the face of a dimmer outlook and slumping share price, XPO is taking a surprising step away from mergers and acquisitions.
Roll 'em up
Over the last decade, under the guidance of CEO Brad Jacobs, the company has made a number of acquisitions, including the $3 billion takeover of Con-way in 2015 and the acquisition of France-based Norbert Dentressangle for $3.5 billion in the same year, which gave the company a strong position in Europe.
That acquisition strategy helped drive the stock up more than 1,700% over the last decade, making it one of the best performers in the S&P 500.
However, the stock fell off a cliff in 2018 after it slashed its outlook and got attacked by a short-seller. That prompted Jacobs to pull away from the company's longtime acquisition strategy -- after he'd recently discussed spending as much as $8 billion on acquisitions -- and instead put that money to share buybacks. At the time, Jacobs argued that the stock was so cheap, buybacks were the best way to spend the money intended for acquisitions. Over the last year, the company has reduced its share count by more than 25%.
Instead of acquiring companies, XPO is now putting its own businesses on the selling block, including its European transportation and supply chain units, its supply chain unit in the Americas and Asia-Pacific regions, and its North American transportation business, excluding the less-than-truckload (LTL) unit that the company has committed to holding onto. Wall Street cheered the announcement, sending the stock up 16% after hours Wednesday.
A fast-changing industry
Jacobs told The Wall Street Journal that if all four businesses were sold, "I would still be CEO, but I would be CEO of a fast-growing, pure-play LTL company with a lot of liquidity." In a press release, Jacobs argued: "We continue to trade at well below the sum of our parts and at a significant discount to our pure-play peers. That's why we believe the best way to continue to maximize shareholder value is to explore our options, while remaining intensely committed to the satisfaction of our customers and employees."
The logistics industry has changed significantly recently with the rise of Amazon.com, which now handles about half of its own package deliveries. XPO said in the spring that its largest customer, believed to be Amazon, had taken its postal injection business away from XPO, costing it $600 million in annual revenue, and XPO expects revenue to decline this year in part due to a soft macro environment.
Amazon has also feuded with FedEx over the last year, ending its contract to ship its own orders with the package delivery giant and temporarily blocking its third-party sellers from doing the same due to concerns about its on-time rates.
A slimmed-down XPO
Jacobs seems to see a potential sale of those units as the best way to create shareholder value as pure-play LTL stocks like Old Dominion Freight Line and Saia trade at higher EBITDA multiples than XPO. LTL is also XPO's fastest-growing business unit, so such a transformation would almost certainly give it a higher multiple as well as an influx in cash to pay down debt and invest in the business.
In its most recent earnings report, Jacobs said the LTL business would hit $1 billion in Adjusted EBITDA by 2021. That compares to a forecast of $1.675 to $1.725 billion in total Adjusted EBITDA for 2017, up 7% to 10% from the prior year. By comparison, through the first three quarters of 2019, operating income in the North American LTL segment grew 26% to $451 million, making up all of the increase in the company's operating profit.
Investors should bear in mind that the sale or spinoff is far from a done deal as it this point. XPO is working on the matter with advisors, and says that no transaction may take place. Considering that much of the business outside LTL has seen sluggish growth, if any, of late, it may be difficult to find a buyer, at least at a price that would satisfy Jacobs.
It's clear the market likes the idea based on the stock's surge, but if no deal emerges, the stock is at risk of a pullback.