XPO mulls downsizing to unlock LTL value

XPO mulls downsizing to unlock LTL value

XPO will not be selling its highly profitable North American LTL business. Photo credit: XPO Logistics.

XPO Logistics’ decision to sell or spin-off as many as four of its transportation and logistics businesses could leave the company much smaller but more tightly focused on its North American less-than-truckload (LTL) operations. 

In a statement announcing the potential divestments Wednesday, XPO drew a bright red line around its US-based LTL division, insisting the third-largest US LTL company is not for sale. In fact, XPO becoming a “pure-play” LTL carrier could be a good thing, according to chairman and CEO Bradley S. Jacobs. 

“If we end up selling all four of the business units — and that’s not a foregone conclusion — we would be a pure-play LTL trucking company with no net debt and many billions of dollars in cash in a publicly traded vehicle,” Jacobs said in an interview with JOC.com Thursday.

Which of those four units might be sold or kept is still unclear though, as XPO phrases its current plan as an open-ended “exploration of strategic alternatives.” 

The sale or spin-off of any of them would mark a watershed in XPO’s history. Jacobs launched the company with a $150 million investment in Express-1 Expedited Solutions in 2011, and used acquisitions to build XPO into a global logistics firm with $17.3 billion in gross revenue in 2018. As recently as the third quarter, Jacobs told investment analysts he was considering acquisitions.

The reason for the sudden shift in strategy lies on Wall Street, rather than in the short-term performance of individual business units. However the exploration of alternatives unfolds, Jacobs is intent on keeping LTL in XPO.

“We do not intend to sell or spin off our North American LTL business given its growth trajectory and we believe LTL as a pure-play would be well understood and properly valued by Wall Street investors,” he said. “We have a tremendous track record of creating shareholder value, and selling or spinning off these units could be a way to create even more value this year.”

That’s potentially good news for US shippers who could benefit from increased investment in and expansion of XPO’s LTL business. “We have many technology projects under way in LTL, from linehaul optimization to dynamic pickup and delivery routing to the use of AI [artificial intelligence] algorithms that incorporate customer behavior to find the right price,” said Jacobs.

XPO’s LTL unit, with headquarters in Ann Arbor, Michigan, has 290 terminals, about 8,000 tractors, and 13,000 truck drivers in the US and Canada. The company serves shippers in more than 75,000 next-day and two-day lanes, according to XPO’s most recent annual report. From 2015 through 2018, the LTL unit’s annual revenue had increased 7.2 percent to $3.8 billion.

The LTL unit’s profitability improved more dramatically, however, as XPO worked to transform the former Con-way Freight. In the 2015 fourth quarter, the LTL carrier’s adjusted operating ratio, a measure of profitability, was 93.3 percent. In the 2019 third quarter, XPO’s LTL operating ratio was 80.8 percent.

The four businesses XPO is interested in divesting are its European supply chain and transportation businesses, its North American transportation business excluding LTL, and its supply chain business that covers the Americas and Asia, Jacobs said. That covers much of the company, including the truck brokerage business that gave XPO its start.

All of those businesses would become large standalone companies if they were spun off. “They’re all top-three leaders in their space,” Jacobs said.

In 2018, XPO’s freight brokerage unit reported $2.92 billion in gross revenue, while its last-mile division had $1.07 billion in revenue, and its European transportation and logistics units brought in $2.87 billion — nearly 40 percent of the company’s total revenue that year when combined.

In the first nine months of 2019, XPO Logistics reported total revenue of $12.5 billion, about 2.9 percent less than in the same period of 2018. Its LTL unit accounted for $2.9 billion in revenue in that period, about half of XPO’s total North American transportation revenue. North American and European logistics revenue totaled $4.5 billion in the first three quarters of 2019.

The LTL jewel in XPO’s crown

XPO refuses to part with its LTL unit, however, and with good reason. XPO is now the second-most profitable carrier among the large, publicly owned US LTL companies, following Old Dominion Freight Line (ODFL).

In the third quarter last year, XPO had its best-ever third-quarter LTL adjusted operating ratio, 80.8 percent, while pre-fuel-surcharge LTL revenue increased 1.6 percent to $839 million. The North American LTL division’s adjusted operating profit rose 33 percent to $187 million. “Even in the midst of a soft industrial market, pricing in LTL has been very strong,” Jacobs said.

“We expect LTL to be a $1 billion EBITDA [earnings before interest, taxes, depreciation, and amortization] business in 2021,” he said. “It would be a well-understood pure-play company if we wound up spinning off or selling all four of the other business units. It would focus our profit improvement plan, which covers the whole spectrum of LTL activities, from pricing to dock efficiency. These tech-enabled projects are under way.”

That could be good news for XPO customers, and especially good news for shareholders, according to Jacobs. Despite its rapid growth since 2011 — XPO recorded just $2.4 billion in total revenue as recently as 2014 — XPO’s stock is undervalued compared with the stock of “pure-play” LTL companies such as ODFL and Saia, Jacobs said. While XPO’s market cap is approximately 8 to 9 times its EBITDA, ODFL’s is approximately 13.5 times EBITDA, and Saia’s 10 times, he said.

“We believe this is because at the current time Wall Street investors favor pure-plays,” Jacobs said. “Sometimes so-called diversified conglomerates are in favor and sometimes they’re out of favor. For the time being, they’re out of favor. There’s a saying: ‘Don’t fight reality because reality always wins.’ Well, Wall Street has spoken. There’s a big demand for LTL pure-plays.”

Sales, spin-offs not guaranteed

Wall Street certainly spoke in favor of XPO’s plans Thursday, as the company’s stock shot up more than $10 per share overnight to the low $90s per share range. The stock's trajectory will likely depend on what comes next. “We may wind up selling or spinning off one, or two, or three, or four of the business units, or none,” Jacobs said. “It all depends on the proposals we get.”

XPO is setting up four concurrent processes to explore options for each of the business units but will only pursue transactions “if we can maximize value beyond what we could do ourselves,” he said. There is no timetable for completion of the review process, but “we think there will be strong demand for the four businesses we’re considering selling,” Jacobs said.

Neither Wall Street nor shippers should be surprised by XPO’s decision to switch from acquisition-fueled expansion to the sale of part of its accumulated business, said Satish Jindel, president of transportation research firm SJ Consulting Group. “Mr. Jacobs is an investor, he’s not a transportation industry guy,” Jindel said. “He wants to get a return on his investment.”

Jacobs made a fortune creating conglomerates in the waste management and equipment rental industries, Jindel said. XPO is his fifth venture and his biggest by far, but the company’s very size now inhibits a grand sale. “Selling the whole company is not much of an option, as I can’t see anyone who’d want to buy all the varied components,” Jindel said.

It’s also harder to grow once a company reaches a certain size, and XPO certainly began to bump against that barrier after numerous acquisitions, including Con-way and the purchase of Norbert Dentressangle in Europe, helped pushed revenue up past $14 billion in 2016. XPO’s year-over-year revenue growth cooled from 223 percent in 2015 to 12.3 percent in 2018.

Most importantly, the decision to sell or spin-off units underscores that XPO exists to provide value to its shareholders, and that its leadership’s strategy must remain flexible enough to shift — even abruptly — to meet that goal. XPO hasn’t been building a transportation and logistics giant just for the sake of improving transportation and logistics, even if that results.

“We’ll do whatever creates value for our shareholders,” Jacobs said. “If that means making acquisitions, we’ll buy. If it means selling businesses, we’ll divest.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.