The Greenwich, Conn.-based third-party logistics provider said it will use the $558 million in cash from TransForce to pay down debt.
The crown jewels of XPO Logisistics’ $3 billion acquisition of Con-way Inc. one year ago were its less-than-truckload and contract logistics subsidiaries. The Con-way Truckload business was the red-headed stepchild of the deal – an extra piece that came along as part of the package, but that didn’t fit well with XPO’s high-growth strategy.
On Thursday, XPO announced it had unloaded its asset-based, truckload business to Canadian trucking and logistics conglomerate TransForce for $558 million in cash. Publicly traded TransForce, which has more than four dozen operating companies in Canada and the United States, picked up about 3,000 tractors, 7,500 trailers and 29 stations, as well as XPO’s truckload customer base.
XPO officials, early on, tried to sell the Con-way truckload piece, but in February decided to keep it after turning down bids from three trucking companies.
In an interview, XPO CEO Brad Jacobs said TransForce approached the Greenwich, Conn.-based third-party logistics provider a couple months ago and made a compelling offer.
“We did receive some offers [before], but the prices were not acceptable. We would have been happy to keep growing Truckload and we were not looking for buyers,” he said.
The problem, from XPO’s perspective, is that Truckload growth lagged the rest of the empire Jacobs has rapidly created in the past four years through a series of rollups that had made XPO a top tier global 3PL, and the second-largest 3PL and third-largest freight carrier in the United States and Canada based on gross revenues, according to research by Transport Topics.
Jacobs said Truckload is growing at just above the rate for U.S. Gross Domestic Product, which has generally been about 1.5 to 2.5 percent in the last few years. XPO’s other segments are experiencing growth rates several times that of GDP, in part because of their heavy exposure to the booming e-commerce sector.
Truckload, which started as Contract Freighters Inc. before being bought by Con-way in 2007, was sold because it’s only the 19th largest truckload carrier in the country and XPO is near the top in all its other lines of business. The company is the largest provider of last-mile delivery for heavy goods, number two in contract logistics, third in intermodal, the second largest LTL carrier in North America and the largest LTL in Europe, and is the second largest truck brokerage in the world.
XPO continues to offer truckload brokerage services to customers in North America, with 38,000 independent carriers and more than 1 million trucks in its network.
In a message to customers, XPO Chief Operating Officer Troy Cooper, said Truckload is “a respected business, but without the scale required by our customer service strategy. Full truckload transportation is still very much a core service for XPO.”
Selling Truckload, he added, also achieved a couple financial goals for XPO. The company will use the proceeds to reduce debt associated with its recent purchases, which will help the balance sheet. The deal also reduced XPO’s capital expenditures on equipment, which is typically replenished every few years in long-haul trucking compared to the LTL sector, where the average life of tractors is much longer. Lower investment in equipment fits with the company’s hybrid asset-light model.
Jacobs said Truckload only handled about 80 loads per day providing line-haul support for XPO’s LTL operation, meaning there won’t be any material impact on LTL activity because of the sale.
The divested operations, previously reported as part of XPO’s Transportation segment, were expected to generate approximately $10 million of operating income for the remaining two months of 2016, and depreciation and amortization of around $10 million. The company said it will update its financial targets to reflect the transaction when it reports its third quarter results on Nov. 2.
Montreal-based TransForce is the 10th largest for-hire trucking company in the United States and Canada, according to the Transport Topics rankings.
Among its brands are LTL carrier Vitran, truckload carrier Transport America and Quik X Logistics. It also offers parcel delivery service. The company had more than $3.1 billion in revenues last year and 15,000 employees.
TransForce was motivated to buy the XPO truckload business, based in Joplin, Mo., because it fit the strategy of increasing the company’s U.S.-based revenues and gaining critical mass in the U.S. truckload market, Alain Bédard, the chairman and CEO, said on a conference call with analysts Friday morning. The United States is the largest economy in the world and TransForce wants a bigger share of revenues to be dependent on the U.S. market.
TransForce, which will operate XPO Truckload as a standalone entity, is gaining a well-run business, a “blue-chip” customer base and important access to the Mexican market, he said.
The company said it expects the acquisition to generate annual revenues of around $530 million and earnings before interest, taxes, debt and amortization (EBITDA) of $115 million in 2016. Combined with TransForce’s current U.S.-based TL operations, the company expects to have annual U.S. TL run rate revenues of nearly $850 million.
Bédard said he was too preoccupied with selling one his own subsidiaries last year to focus on making a bid when Truckload was formally up for sale. The timing was good now, from a valuation standpoint, because earnings for U.S. truckload carriers are down 15 to 20 percent in today’s sluggish freight market, he added.
“We want to build a North American truckload company with a strong presence in Canada and we want the Mexican connection because the trade between Mexico and U.S. will keep growing,” Bédard said, adding that Canada-Mexico traffic is also strong. Growth in U.S.-Canada truckload volume appears to have less upside, he said.
XPO Truckload does eight to nine times more business with Mexico than Transport America, the TransForce CEO said.
XPO truckload has an excellent management team, with many people holdovers from the CFI days, and 20 percent of its revenues come from independent contractors, which is high for the asset-heavy truckload industry, Bédard noted.
Lack of market scale drove sale of XPO Truckload, Jacobs says
