XPO Logistics has acquired Pacer International for $335 million, taking a large step into the intermodal arena.
Pacer is the third largest provider of North American intermodal services and has a significant cross-border service to Mexico.
The deal, which still must be approved by regulators and Pacer shareholders, is expected to close in the second quarter; the acquisition proposal comes with a $12.4 million breakup fee. XPO will fund the acquisition with a combination of cash and stock that can be funded on a debt commitment from Credit Suisse AG for up to $325 million.
“Strategically, this is another milestone in the same original strategy that we thought through and plunged into with great rigor in 2011,” XPO Chief Executive Officer Brad Jacobs said in a conference call. “Our goal is very clear. Our goal is to become the premiere supplier of transportation services in North America.”
Officials are currently working on a plan to merge the businesses. While Jacobs said Daniel Avramovich, Pacer’s CEO, and Pacer’s management join XPO in a new unit, there is still a lot of work having to do with, for example, the company’s IT system. The system Pacer uses is going to need some wrangling to weave into XPO’s platform, Jacobs said, because it’s a solid, homegrown system, and integration “can’t be done overnight,” he said.
“It’s not like we’re buying a plan-vanilla truck brokerage firm,” he added.
Jacobs said the heart of this deal is about differentiating services and becoming an all-in-one shop. This acquisition is just part of the strategy.
“There’s nobody else who can walk into a shipper and say, ‘We’re the fourth largest freight broker; we’re the largest last-mile logistics provider; we’re the largest facilitator of expedited shipments; we do managed transportation; and now we have the number three position in intermodal and … the number one position in cross border down to Mexico.”
Scott Malat, XPO’s chief strategy officer, said buying Pacer International gives XPO a huge step up in the intermodal business.
“What XPO can bring to the table is that we can convert business currently on truckload that makes sense to do so over to intermodal. That’s very attractive, and it’s a win-win situation for both us, and for the rails, and for the drayage companies that we work with.”
Jacobs said the deal is not about cost savings and reductions. Though some redundancies will be eliminated he characterized that as “not a lot” and said the deal is about providing more value to customers to smaller customers who haven’t been in the intermodal business while at the same time providing Pacer’s larger customers with more options.
“It’s really more a revenue-synergy play than a cost-synergy play,” Jacobs said.
He added that XPO kept the smaller offices of Turbo Logistics, the freight brokerage division of OHL the company acquired in October, intact, but had employees from offices where XPO has a large footprint, as in Chicago and Dallas, into their own spaces, which lead to some cost savings.
“But it wasn’t about headcount reduction; it was about getting more people together in a room,” Jacobs said.
Even with the completion of XPO’s largest transaction in its two-year history, Jacobs said there’s no time to rest.
“We’re just at the early stages of building a very large, world-class company,” he said, adding the goal remains to achieve a $5 billion run rate by 2017.
“That type of a fast-growth business plan requires discipline, requires attention to detail, requires operational excellence and good execution — it doesn’t permit slowing down and taking breathers,” he said.
In an investor note, Stifel Nicolaus applauded the transaction as the right way forward for XPO.
“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, de-emphasized growth in the less-defensible truck brokerage market, which in recent years has become more commoditized,” Stifel said. “We commend XPO management for this crafty change in strategic course, which should more easily allow for the achievement of the company’s long term financial objectives.”
XPO Logistics buys Pacer International for $335 million
