XPO continues aggressive acquisition spree with European 3PL and U.S. drayage firm.
There can be little doubt now that Brad Jacobs meant business when he said he wanted to consolidate the logistics industry.
That’s because Jacobs’ company, XPO Logistics, made a huge splash in late April with the $3.5 billion announcement to purchase the iconic French logistics company Norbert Dentressangle. XPO followed that move a week later with the acquisition of Bridge Terminal Transport Services, one of the largest motor carriers serving ports and intermodal facilities in the United States, for $100 million.
But the ND acquisition is the one that will resonate for a while, a move described by analysts and XPO Chief Executive Officer Jacobs as transformational. It was as surprising as it was important.
XPO began as a rollup of the North American freight brokerage market and then asset-light businesses that complemented truck brokerage, but in just a few years it has pivoted to become a diversified logistics provider, with market-leading positions in certain niches (final-mile logistics) and hefty positions in others (intermodal and contract logistics). When the new deals are finalized this summer, XPO will have made 16 acquisitions in the span of 3.5 years.
That’s a much more measured pace than the 200 companies Jacobs bought over a three-year period after co-founding United Rentals in 1997.
The acquisition of ND, which will be rebranded XPO Europe, takes that diversification a step further. As Jacobs said on a call with investors a day after announcing the acquisition, the deal allows XPO to provide broader geographic coverage and services to its existing clientele, customers that Jacobs said have been clamoring for more services in different regions. XPO will also be able to cross-sell its services to a new set of multinational customers.
But it also opens up a new market to XPO’s fast-growth strategy that has been based on a potent mixture of carefully planned acquisitions and organic growth driven by XPO’s investment in technology.
ND is a large contract logistics provider and freight forwarder with a large European trucking operation, reverse logistics and e-commerce fulfillment capabilities. Headquartered in Lyon, France, it has 662 locations and about 42,350 employees, compared to 10,000 for XPO. ND has a diversified base of business, with its largest customer representing less than 4 percent of revenue.
When asked if Jacobs envisioned buying a European trucking company (ND is famous in Europe for its large fleet of red trucks, including 7,700 company-owned vehicles and 3,200 sub-contracted with owner-operators), he admitted he has thought further afield about acquisitions that will make XPO successful for customers and shareholders than initially imagined.
But Jacobs also countered the notion that ND is primarily a trucking company—with 20 percent of revenue coming from trucking and roughly 50 percent from contract logistics.
He enthusiastically discussed the potential of merging the contract logistics might of ND in Europe, ND’s $750 million acquisition of U.S.-based contract logistics provider Jacobson Cos. last year, and XPO’s 2014 acquisition of New Breed Logistics.
In fact, it was XPO’s failed pursuit of Jacobson that led to ND.
“We wanted to buy Jacobson—we thought it would be a perfect fit,” he said. “That’s why we started studying Norbert Dentressangle [after ND won the bid to buy Jacobson] and became enamored with them. We were disappointed we didn’t get Jacobson, but it was a blessing in disguise because it introduced us to ND.”
XPO said it intends to make substantial investments in its European operations, in part through the deployment of technology. For example, it will deploy its proprietary Freight Optimizer platform in Europe to support carrier sourcing and customer service in the $104 billion road transport market in the United Kingdom, France and Spain.
XPO, based in Greenwich, Conn., expects combined annual spending on technology of about $225 million. Last year it spent about $115 million on technology.
Hervé Montjotin, chairman of the executive board and CEO of Norbert Dentressangle, will serve as CEO of XPO’s European business and president of the parent company. XPO promised not to reduce the number of full-time employees in France for at least 18 months from closing the deal, with Jacobs emphasizing that the benefit of the deal for XPO comes from market and service expansion, not synergy.
The company’s plan to harness synergies between the North American contract logistics providers New Breed and Jacobson is not yet in place, “but if we can’t put them together to make an even better company, we’re in the wrong business,” Jacobs said.
The eye-popping nature of the deal comes from the fact that it more than doubles the size of XPO—ND is in fact bigger in revenue than the company acquiring it. By XPO’s projections, the company’s revenue run rate (essentially its most recent quarterly revenue extrapolated out over a year) is $9.5 billion, with operating profit of $625 million, by the end of the year, including contributions from BTT. That’s almost quadruple the amount of revenue the company generated in 2014. Only four months ago, company officials set a target of $9 billion in revenues by 2017.
XPO executives joked on the call that there was disbelief a few years back when they suggested they would reach $200 million in operating income, but such has been the pace of the company’s acquisition strategy that it keeps hitting growth targets early.
“Just as investors were beginning to worry that XPO was losing out on acquisitions in the states, the company pivots to Europe and buys a company considerably larger than itself,” the investment bank Stifel said in a note to investors about the acquisition. “In one transformational deal, the company nearly achieves its 2017 guidance in the 2Q15. We, and most others we suspect, were not thinking of European companies as acquisition targets and we were not contemplating companies of this size.”
The deal values ND at 9.1-times the company’s operating profit. It’s a seller’s market these days in logistics and the value clearly includes ND’s combined freight management and contract logistics operations, beyond its asset-based trucking operation.
Stifel and other analysts called XPO’s valuation of ND favorable in relation to other strategic acquisitions made in recent months, and noted the strong dollar made ND about 20 percent cheaper than it would have been a year ago.
“Norbert puts XPO on the map in several new areas of European and global logistics,” the note said. “Presumably this will not be XPO’s last deal and if one assumes a few more large-scale transactions, new 2017 revenue targets could be well above $10 billion and new 2017 EBITDA targets could approach $750 million or even $1 billion.”
XPO’s purchase of the drayage provider BTT proved that to be true and most analysts don’t suspect the company will stop there.
In typical style, Jacobs said the company is already working on its list of future acquisition targets, both in North America and now in Europe.
“We would have been nervous about doing acquisitions in Europe without Norbert, because we didn’t have the platform, or the management structure there,” he said, noting his team had already worked with ND on potential targets in Europe that ND was considering.
“We’ll make sure we don’t lower our guard and fall in love with anything at the expense of valuation,” he said.
The deal is even more transformational than XPO’s purchases in 2014 of Pacer International and New Breed, moves that brought it significant positions in the intermodal and contract logistics markets.
It vaults XPO into a top 10 provider of global logistics, and allows it to create scale in Europe’s freight brokerage and outsourced logistics markets. Jacobs has long argued that the rationale for his strategy is that logistics customers need capacity and technology, and scale allows a logistics company to provide better service in both areas.
He also said having a presence in Europe will help XPO attract top talent interested in international opportunities, and foster the cross-pollination of best practices across overlapping business units. He was careful to note there was little geographic and customer overlap between the two organization, and ND’s management team will remain to run the European business (a move that falls in line with XPO’s other acquisitions).
“Norbert Dentressangle was not the finished article—it has been growing its freight forwarding business and is weak in Asia—so we can expect its new owners to continue with in-fill acquisitions to address these whitespots,” John Manners-Bell, the CEO of Transport Intelligence, wrote in a blog piece.
Ti is a transport and logistics research firm based in the United Kingdom.
Manners-Bell said the deal reflects confidence in Europe’s logistics market.
“In much the same way as the FedEx-TNT deal, it is a sign of confidence in the European economy, especially the U.K., where Norbert Dentressangle is so strong,” he said. “The strength of the dollar no doubt helped the deal, but we suspect that it would have happened anyway.”
BTT. The deal for BTT was less expensive and notable, but helps XPO increase its scale in the North American drayage market.
The purchase price values BTT at a multiple of eight-times operating profit, which was $12.4 million for the fiscal year ended March 31. Analysts say that seems like a fair multiple for a quality company. During that period, BTT had total revenues of $232 million.
BTT is among a handful of trucking companies that has begun to lease some of its own chassis to ensure capacity and reduce downtime for drivers at a time when chassis availability is contributing to port congestion.
BTT, a spinoff from Maersk Line several years ago, operates 28 terminals around the country and manages about 1,300 independent owner-operators. It has around 250 employees, led by CEO Hans Stig Moller, and 1,800 customers.
XPO, which gained a significant drayage operation through its 2014 acquisition of Pacer International, said adding BTT will significantly expand its drayage capacity on the U.S. East Coast. It also provides capacity to support XPO’s intermodal network and deliver its containers to and from the railheads, BB&T Capital Markets analyst Kevin Sterling said in an interview.
“Our purchase of BTT will almost triple our drayage capacity to over 2,000 independent owner-operators,” Jacobs said in a statement. “When we close the transaction, we’ll have approximately 6,200 independent owner-operators in our network, providing service to our customers in intermodal, last-mile and expedite. We’ll integrate BTT and rebrand the operations under our single, global brand of XPO Logistics.”
Measured Leverage. The company’s willingness to digest another acquisition mere days after more than doubling its size shows how keen Jacobs and XPO’s executive team is to grow fast.
In February, XPO also bought UX Specialized Logistics, a trucking company that provides non-asset-based, last-mile delivery and home goods installation for major retail chains and online businesses, for $59 million. UX had revenue of $113 million last year and immediately boosted XPO’s earnings.
“Most rollups fail,” Jacobs said. “Anyone can buy, but they don’t think through the integration. We have that organizational infrastructure. There’s always risk in acquisitions, which is why we do it at a measured pace. I don’t lose sleep at night over integration.”
“If [Jacobs] can get the stuff integrated, it will be one hell of a company,” Richard “Dick” Armstrong, the chairman of logistics research firm Armstrong & Associates, said of all the acquisitions. “But it’s getting pretty complex now, so one wonders how long it will take to integrate.”
It took DHL, he noted, a decade to really get Exel functioning well within its organization after taking over the company.
Money for mergers does not appear to be an issue, even as recent acquisitions have become more expensive. The question is whether investors are getting the returns they expect.
XPO is publicly traded and last September it secured $700 million in equity funding from three institutional investors: PSP Investments; GIC, Singapore’s sovereign wealth fund; and the Ontario Teachers’ Pension Plan. XPO sold them blocks of newly issued common stock in exchange for a commitment not to sell the shares for a period of time.
XPO says it has more than $1 billion in cash from the equity deal and sale of debt, a $2.6 billion financing commitment from Morgan Stanley, as well as a revolving line of credit worth up to $415 million to cover transaction costs.
“We’ve always said we’re committed to having a prudent capital structure,” Jacobs said. “We always want to be in the range of three- to four-times leverage. Can we go a bit above that during an acquisition phase? Yes. What’s great is we have options. We have capital markets we can tap, and whatever makes most sense for our shareholders, that’s what we’ll do.”
Eventually, XPO will have to make money to succeed, but it is losing less money than before on a pure operations basis. Its net loss last year was $63.6 million, compared with a net loss of $48.5 million in 2013, but operating profit was $56 million compared to a $32 million loss the prior year. And adjusted for one-time transaction and other costs, the profit was $81 million.
XPO halved its first-quarter loss from a year ago to $14.7 million in the first quarter of 2015. The 349 percent year-over-year increase in net revenues (total revenue minus purchased transportation) to $262.2 million for the quarter was mostly due to revenue from new acquisitions.
Investors appear happy, so far. Pre-tax earnings are getting better, although earnings per share are still low. But investors can see a path forward and each quarter the company’s financial performance continues to improve. That’s why XPO’s stock price in the past 12 months has more than doubled from $22 a share to $48 in the first week of May.
This article was published in the June 2015 issue of American Shipper.
