The courtship between truck brokerage and intermodal rail just got serious, and they may even be headed to the altar. XPO Logistics’ acquisition of Pacer International, the third-largest U.S. intermodal operator which handles some 10 percent of U.S. intermodal volumes, promises to speed the integration of asset-based intermodal services and non-asset truck freight brokerage and deliver intermodal options to many shippers not yet using rail.
The $335 million deal is clearly a step in the transformation of a truck freight brokerage — traditionally all about the truck and the load — into a more multimodal business, a step many observers have been expecting and encouraging as international and domestic intermodal volumes in North America grow.
Total intermodal volume rose 4.7 percent year-over-year in the third quarter, following a modest gain of 2.4 percent in the second quarter, according to the Intermodal Association of North America. Domestic volume increased 7.7 percent. Third-party logistics companies, however, increased the amount of freight they move by intermodal rail by 8 percent year-over-year on average in the third quarter, a six-quarter high, according to the Transportation Intermediaries Association.
“We’ve been preaching a long time that intermodal is here to stay and every third-party logistics company needs to have an intermodal arrow in its quiver,” said Robert Voltmann, president and CEO of the TIA. “The reward is there for them, because they can actually reduce the cost to the shipper and increase their margin.”
Building a Diverse Portfolio
XPO Logistics has been collecting all types of arrows, buying ten companies over the past two years as it builds an increasingly diversified portfolio that stretches from domestic truck brokerage, international freight forwarding and expedited transportation to last-mile logistics and supply chain management.
The acquisition of Pacer International, along with the $365 million purchase of 3PD Holding last summer, shows how XPO’s vision has broadened since 2012, when investor Bradley S. Jacobs became chairman and CEO after engineering a $150 million investment in the company. Basically, XPO is listening to shippers who want more than access to truckload capacity. “We’re positioning ourselves to be a one-stop, full-service provider” to the customer, said Jacobs. Increasingly, “a customer would much rather deal with a single-source provider than several companies,” he told the JOC. “There’s a lot of value in winnowing down your vendor base.”
That’s a “crafty change in strategic course,” said John G. Larkin, managing director at the Stifel Transportation & Logistics Research Group. “By moving into the last-mile delivery market, the transportation management systems arena and now the intermodal market, the company has wisely, in our view, deemphasized growth in the less defensible truck brokerage market which in recent years has become more commoditized,” Larkin said in a Jan. 6 note to investors. Diversification should “more easily allow for the achievement of the company’s long-term financial objectives,” which Jacobs identified as hitting $5 billion in annual revenue by 2017.
Pacer will help XPO get closer, nearly doubling its annual revenue and making XPO a $2 billion transportation and logistics company by the end of 2014. Pacer expects between $1.1 billion and $1.3 billion in revenue in 2014, a 10 to 18 percent increase from its earnings guidance for 2013, the company said in November. XPO hit a $1 billion revenue run rate at the end of the year, Jacobs said, after more than doubling its revenue in the third quarter. However, less than $20 million of that revenue currently comes from intermodal services. Pacer says it handles about 10 percent of all domestic intermodal freight movements and is the largest provider of intermodal service between the U.S. and Mexico.
Introducing Intermodal to Smaller Shippers
“We bought Pacer primarily because of its leading position in intermodal and in Mexico,” Jacobs said. “There will be lots and lots of cross-selling” between the intermodal operation and XPO’s brokerage business, he said. “We’re probably going to merge the sales forces in to one integrated sales force.” Those sales people will sell Pacer’s intermodal services primarily to XPO’s 9,500 small and mid-sized customers, which include thousands of shippers that don’t use intermodal.
“We will be introducing intermodal to thousands of new customers through the XPO Logistics network, and we look forward to working closely with XPO to ensure a seamless integration,” said Pacer Chairman and CEO Daniel Avramovich, who, along with most of Pacer’s management, will stay with XPO’s intermodal operation.
If third-party logistics companies can convert their freight, those shippers, often more truck-dependent than many larger companies simply because of the scale of their business, would significantly expand intermodal market share. “As our members expand their intermodal offering, they’re going to be selling to people who have never moved freight by rail before,” said TIA’s Voltmann. “Those members control the movement of over $100 billion worth of freight every year. Think about a 5 percent shift of that freight and it’s $5 billion. That’s enormous.”
The Pacer-XPO deal won’t have much of an impact on intermodal competitors Hub Group and J.B. Hunt Transport Services, said Justin Long, an analyst at Stephens, a Little Rock, Ark.-based investment research firm. Intermodal volume growth is expected to be steady and pricing competitive in 2014. Long noted that the asset-heavy nature of Pacer, which owns roughly 16,000 containers, contrasts with to the normally asset-light XPO. However, Jacobs said told analysts during a Jan. 6 conference call he realized asset ownership was important to Pacer. Intermodal marketing companies in recent years have moved toward owning containers, which allows them to gain more favorable contracts with Class I railroads.
The Hub Group, for example, has in recent years increased the share of the containers it owns from roughly 35 percent to 80 percent.
XPO at a Crossroads in the Maritime Market
Pacer also comes with truck brokerage, freight forwarding and non-vessel operating common carriage operations that represented $57 million in third-quarter revenue. Those non-intermodal businesses include freight forwarder RF International and non-vessel operating common carrier Ocean World Lines. That puts XPO at the crossroads in how it positions itself in international ocean.
With XPO Global Logistics, a freight forwarding operation, the company is on the road to building an international forwarder offering multiple services for end-user shippers, akin to a Kuehne + Nagel, Schenker or Panalpina. OWL is a neutral NVO whose business is based on an understanding with its forwarder customers that it will not pursue their ultimate customers. But in building a forwarding business, XPO will be motivated to actively pursue those customers. OWL's import TEU volumes through last November were down 46 percent over two years, to 11,155 TEUs, according to PIERS, the data division of JOC Group.
XPO will give Pacer’s highway brokerage operations access to its own network of 24,000 carriers and its technology, Jacobs said. XPO will review Pacer’s international businesses, said Jacobs. “They have a fair amount of air and ocean business and so do we,” Jacobs said. However, compared with Pacer’s intermodal and Mexican business, the logistics businesses are “icing on the cake.”