Acquisition of French logistics giant Norbert Dentressangle clearly shows XPO has diverged from its initial strategy to roll up the North America freight brokerage market.
If there was ever any doubt that Brad Jacobs meant business when he said he wanted to consolidate the logistics industry, that doubt is likely long gone now.
That’s because Jacobs’ company, XPO Logistics, made a huge splash Tuesday, announcing it will pay $3.5 billion for the iconic French logistics company Norbert Dentressangle. The move is as surprising as it is important.
XPO began as a rollup of the North American freight brokerage market, but in just a few years has pivoted to become a diversified logistics provider, with market leading positions in certain niches like final mile logistics and hefty positions in others, such as freight brokerage and contract logistics.
The acquisition of ND, which will be rebranded XPO Europe, takes that diversification a step further, into a new geography. As Jacobs said on a call with investors Wednesday, the deal allows XPO to provide broader geographic coverage and services to its existing clientele – customers 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 customers.
But it also opens up a new market to XPO’s fast growth strategy, which has been based on a potent mixture of carefully-planned acquisitions and organic growth driven by XPO’s investment in technology.
When asked if he envisioned buying a European trucking company (ND is famous in Europe for its large fleet of red trucks), Jacobs admitted he has thought further afield about the acquisitions that will make XPO successful for customers and shareholders than he would have initially imagined.
But Jacobs also countered the notion that ND is primarily a trucking company. Twenty percent of ND’s revenues come from trucking, while roughly 50 percent come from contract logistics. Most of XPO’s prior acquisitions have been in asset-light markets.
He enthusiastically discussed the potential of merging the contract logistics might of ND in Europe, ND’s $750 acquisition of U.S.-based contract logistics provider Jacobson Companies, and XPO’s acquisition of New Breed Logistics.
In fact, it was XPO’s failed pursuit of Jacobson that led them 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.”
Jacobs said the plan to combine New Breed and Jacobson is not yet in place, “but if we can’t put them together a make an even better company, we’re in the wrong business.”
The eye-popping nature of the deal comes from the fact that it more than doubles the size of XPO. ND was, in fact, a bigger company in terms of revenue than the one that acquired it. By XPO’s projections, the company’s revenue run rate (essentially its most recent quarterly revenue extrapolated out over a year) is north of $8 billion, and puts it in touching distance of the $9 billion in revenue it projected for 2017 only a couple of months ago. Projected operating income is in the $450 million range for the combined company.
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 aggressively acquisitive strategy that it keeps hitting growth targets early.
The question, of course, is where the money comes from. XPO said it has more than $1 billion in cash and 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.”
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 that his team had already worked with ND’s team 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.”
Both Jacobs and analysts characterized the deal as transformational – far more even that its purchases in 2014 of Pacer International and New Breed, moves that brought it significant positions in the intermodal and contract logistics markets.
This deal 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 that scale allows a logistics company to provide better service in both areas.
He also said that 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 that there was little geographic and customer overlap between the two organization, and that ND’s management team will remain to run the European business, a move that falls in line with XPO’s other acquisitions.
“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.”
Jacobs hails transformational XPO deal
