CEO of XPO Logistics Brad Jacobs told investors and media tight truck capacity helped prompt the company’s investment in an asset-based business.
Standing pat is not in XPO Logistics’ vocabulary.
Three months after completing the surprise acquisition of iconic French logistics and trucking company Norbert Dentressangle for $3.5 billion, the company Wednesday afternoon announced plans to acquire Con-way Inc. for $3 billion – instantly vaulting itself to the number two position in the $35 billion less-than-truckload market.
The transaction, expected to close next month, includes the assumption of $290 million in Con-way debt. The valuation is approximately 5.7 times the company’s consensus 2015 earnings before interest, taxes, debt and amortization (EBITA) projection of $528 million.
The deal is surprising on several fronts. XPO is still integrating the Norbert Dentressangle operation as well as the $100 million buy of port drayage carrier Bridge Terminal Transport Services this year, has taken on increasing amounts of debt and has strayed into a business with extensive capital requirements for equipment and infrastructure after starting out with an asset-light model.
In a conference call with analysts Thursday morning, XPO Chief Executive Officer Bradley Jacobs said one of the strategic reasons for the deal was to lockdown LTL and truckload supply ahead of expected tightening of capacity as the truck driver demographic worsens (older drivers not being replaced by younger hires) and tighter government safety regulations weed out more drivers.
“We want to be prepared for what some people call the ‘mother of all capacity squeezes’ in a few years. Controlling capacity in that scenario, will be extremely helpful. And we got a taste of that in 2014 when capacity got tight, mainly because of the weather,” Jacobs said.
Con-way’s largest subsidiary is LTL carrier Con-way Freight. It also owns Menlo Logistics, Con-way Truckload and Con-way Multimodal, all of which will be rebranded as XPO Logistics.
Con-way has high customer satisfaction and driver retention rates, as well as a strong national LTL network, but has struggled in recent years meeting investors’ expectations for profitability.
Jacobs said XPO plans to change that by focusing on every detail of the operations, starting with eliminating cost overlaps within the Con-way organization to the tune of $170 million to $210 million per year.
Menlo Logistics, for example, has a $227 million annual budget for information technology that is primarily supported by outsourced vendors. XPO, which has developed its own expertise and systems to automate truck and intermodal rail brokerage, will insource Menlo’s IT operation at a much lower cost, according to Jacobs.
The scale of the combined companies will allow XPO to approach vendors for volume discounts. XPO also expects to save money from duplicative back office operations, as well as in its $3.6 billion in purchased transportation and $2.7 billion in freight management because of its ability to find revenue-bearing loads for backhauls with its technology. On the LTL side, Jacobs said XPO plans to shift a portion of the line haul to intermodal to save money.
Jacobs said he will run the Con-way Freight business himself for the time being, but that a search for someone to implement the cost reductions and maximize efficiencies will be launched soon. He suggested that a new leader could come from outside the trucking and logistics industry, possibly form car rentals or any business that involved running a network.
The acquisition of Norbert Dentressangle and its trucking network made XPO executives realize the benefits of having transportation assets, Jacobs said.
He added that the integration of Norbert Dentressangle is going extremely well and that the company has the bandwidth to successfully incorporate Con-way into the mix. Last week’s departure of Hervé Montjotin as head of XPO Logistics Europe was predicated on the goal of running a lean team and Jacobs said the rest of the ND management remains onboard.
The purchase of Con-way is based on a cash price of $47.60 per share. The per-share cash price represents a premium of approximately 31.6 percent to the closing price of the company’s common stock on Sept. 8, and 22.9 percent compared to the average closing price over the past 90 trading days.
Headquartered in Ann Arbor, Mich., Con-way operates 582 terminals and warehouses with approximately 30,000 employees serving over 36,000 customers. Analysts estimate the company will pull in $5.7 billion in revenues for the full year in 2015 and expect the transaction to be substantially accretive to XPO’s earnings in the first 12 months.
The acquisition also expands the company’s global contract logistics platform with the addition of 22 million square feet of space in 160 facilities for a total of 151 million square feet under control. XPO entered contract logistics with the acquisition of ND and Pacer in 2014.
Morgan Stanley has agreed to provide XPO $2 billion to go with approximately $1.2 billion in cash and an undrawn $415 million revolving line of credit. Jacobs said the company plans to quickly de-leverage debt – which is one level above its desired threshold of four times EBITDA – through profit improvement, efficiency gains and cost reductions and from free cash flow.
Douglas Stotlar, Con-way’s president and chief executive officer, will serve in a limited role as an independent advisor to the combined company through the first quarter of 2016. The company will have a combined workforce of approximately 84,000 employees at 1,469 locations in 32 countries.
The companies listed several positive outcomes of a potential tie-up. Con-way’s various operations serve “blue chip” customers in the high tech, healthcare and retail sectors, complementing XPO’s expertise in aerospace, retail, telecom, agriculture, chemicals and food and beverage.
XPO said the merger will also strengthen its position in the e-commerce sector, which the company expects to grow at an annual rate of 18 to 21 percent.
The addition of Con-way’s truckload fleet, including dedicated carriage, will increase cross-border services to and from Mexico, projected to outperform industry growth due to the near-shoring of manufacturing.
The combined company will boast a global ground transportation fleet of approximately 19,000 owned tractors and 46,000 owned trailers, 10,000 trucks contracted through independent owner operators, and access to more than 50,000 independent carriers. XPO said it will remain asset-light after the merger, however, with net capital expenditure of 3.3 percent of revenue and asset-based operations accounting for about a third of its overall sales.
“LTL is a non-commoditized, high-value-add business that’s used by nearly all of our customers. Con-way is a premier platform that we will run with a fresh set of eyes as part of our broader offering. Importantly, we’ll gain strategic ownership of assets that will benefit our company and our customers during periods of tight capacity.
“Another crown jewel in this transaction is Con-way’s subsidiary, Menlo Logistics, an asset-light top 30 global contract logistics provider with additional lines of business in freight brokerage and managed transportation. Menlo serves blue chip contract logistics customers in verticals such as high tech, healthcare and retail, which complement the verticals we serve at XPO,” Jacobs said in a statement.
“The Con-way transaction will nearly double our pro-forma full year EBITDA to approximately $1.1 billion and increase our revenue to $15 billion upon closing. We’ll immediately begin executing our plan to improve the operating profit of the acquired operations by $170 million to $210 million over the next two years. We’ll raise our year-end 2015 target run rates for revenue and EBITDA, and issue new long-term targets, when we close.”
“This landmark transaction provides immediate cash value for our shareholders and reflects the outstanding contributions of our employees over our 86-year history,” said Stotlar. “The combination will mean more services for our customers, more miles for our drivers, and more career opportunities for our employees as part of XPO’s global organization. We look forward to working with the XPO team to complete the transaction and ensure a smooth transition.”
XPO makes LTL splash with $3b purchase of Con-way
