Three months after completing the surprise acquisition of powerful French logistics and trucking company Norbert Dentressangle for $3.5 billion, the company announced plans Sept. 9 to acquire Con-way Inc. for $3 billion—instantly vaulting itself to the No. 2 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 about 5.7 times the company’s consensus 2015 earnings before interest, taxes, debt and amortization (EBITA) projection of $528 million. That’s a more favorable price multiple than the 9.1-times profit XPO paid for Norbert Dentressangle, which was its first expansion into international markets.
The deal, which underscores a growing trend toward consolidation in the fragmented logistics arena, 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, and has taken on increasing amounts of debt and strayed into a business with extensive capital requirements for equipment and infrastructure after starting out with an asset-light model in truck brokerage.
In a conference call with analysts, 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 capacity tightening as the truck driver demographic worsens (older drivers not being replaced by younger hires) and tighter government safety regulations weed out more drivers.
XPO will now have a hybrid trucking model with brokered, owned and contracted capacity.
“We already are running a highly profitable blended network in Europe, where we have leading LTL positions in the U.K., France, Spain and Portugal. We’ll now be able to share LTL best practices to a much greater degree on both sides of the Atlantic,” Jacobs said.
XPO remained true in the Con-way deal to another strategy of becoming the No. 1 one, or 2, provider in any freight niche it participates in. Scale and technology are key ingredients of XPO’s growth recipe.
“We didn’t want to go into LTL as a minor player,” Jacobs said.
Con-way’s largest subsidiary (65 percent of gross revenues) is LTL carrier Con-way Freight. It also owns Menlo Logistics (about a quarter of gross revenues), Con-way Truckload and Con-way Multimodal, all of which will be rebranded as XPO Logistics.
Most XPO customers also use LTL for shipping smaller loads and now the company has the opportunity to keep that business internally.
Jacobs, who along with other board members and executives, owns about 16 percent of the company’s shares, said he is confident the deal will create “significant” value for shareholders in the coming years.
Skeptics in the investor community point out that past attempts at creating one-stop shops for logistics services haven’t fared particularly well, because LTL, truckload, air freight, intermodal, freight forwarding and warehousing are different products and customers want the lowest price. Con-way, for example, once owned all-cargo airline Emery Worldwide, which eventually was shut down because of maintenance violations and became a heavy-weight air forwarder that was bought by UPS eight years ago. And roll-ups in other industries have frequently not succeeded.
Those concerns are valid, but XPO is “not going to be a company that is stable, boring, predictable, repetitive, or non-agile. We are going to be agile, opportunistic, flexible, and adaptable. We are going to listen very, very closely to customers. We are going to skate to where the puck is going, not to where the puck is,” Jacobs said.
ND and XPO are each moving about 45,000 loads per day in Europe and North America, respectively, and with Con-way the company will handle 150,000 loads per day.
“We can run the business. We have the management bandwidth. It’s just a question of being organized and focused,” XPO’s CEO said.
XPO’s scale will enable it to be more efficient and pass along some of the savings to customers, he noted, as well as give it much greater access to decision-makers in companies that purchase freight services.
Customers, he argued, don’t think about moving goods in terms of mode, but rather how they can get products through national and international supply chains as cost effectively and reliably as possible.
“Nobody has more next-day and two-day lanes in LTL than Con-way. So the quality of the network is very, very strong. What we want to do now is manage that network more intensely, with more concentration on profitability,” Jacobs said. “The service is great. It’s not a fixer-upper.”
Later, he added, “We are going to focus on executing on the minutia” in every part of the organization.
The Con-way transaction will increase XPO’s projected revenue to $15 billion and nearly double pre-tax earnings to $1.1 billion. XPO has said it is on track this year for about $9.5 billion in pro forma revenue—what it expects when acquisitions are included—after earlier this year setting a target of $9 billion in revenue by 2017. Con-way will be XPO’s 17th acquisition in a little more than 3.5 years, which helps explain how revenue has grown so fast from $200 million four years ago and is projected to reach $23 billion by 2019.
In August, XPO reported a half-year net loss of $93.2 million, primarily due to taxes and integration costs, but said operating profit improved to $109.3 million from $14.8 million in the same period in 2014. Gross revenue was $1.9 billion.
Company officials say they plan to boost operating profit to $1.5 billion or more in several years.
“When you have $14 billion of cost you should be able to find a few hundred million of cost to take out,” Jacobs said.
The company founder said XPO plans to eliminate cost overlaps and make operational improvements within the Con-way organization, boosting operating profits to the tune of $170 million to $210 million over the next two years.
Con-way, 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 Conway’s IT operation at a much lower cost, according to Jacobs.
The scale of the combined companies will give XPO the purchasing power to approach suppliers of fuel, warehouse space, equipment, maintenance, and other products for volume discounts. XPO also expects to save money from duplicative back office and public company compliance activities, as well as by reducing its combined spend of $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 proprietary load-matching technology. The data from Con-way’s brokerage and transportation management businesses will be plugged into XPO’s freight optimization engine, further expanding its ability to identify carriers, assign loads and fill empty trailers.
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 car rentals or any business that involved running a network.
Jacobs acknowledged the acquisition of Norbert Dentressangle and its trucking network made XPO executives realize the benefits of owning transportation assets, but stressed the company will remain asset-light after the merger with net capital expenditure equal to 3.3 percent of revenue and asset-based operations accounting for about a third of overall sales.
“I do not think this is a shift of our strategy,” he said. “I think this is an evolution of our strategy and being responsive to what’s changing in the industry.”
The serial entrepreneur, who built United Rentals and United Waste Management into industry leaders through similar roll-up investment approaches, disclosed that XPO tried to buy Menlo Logistics a couple years ago, but the transaction fell down for tax reasons. XPO officials didn’t want to buy the entire company then because the mindset was to remain a non-asset-based company with some modest equipment investments in intermodal. But after visiting with ND customers in Europe, it became clear that they had more meaningful relationships with companies that controlled a portion of their assets.
“As a broker, by and large you’re not sitting at the adult table,” Jacobs said. “You’re going to get 3 percent, 4 percent, 5 percent of the transportation spend of the big shippers. So having that asset component, even though it’s a minority of our business, really does change our perception from our customers. And I have to tell you, in the last 24 hours we’ve had an overwhelmingly positive response from customers and employees.”
Since the difficult winters over the past two years, many shippers have accepted significant rate increases to purchase transportation from asset-based carriers and brokers to ensure they will have capacity when needed, he said in a client note.
Jacobs added the integration of Norbert Dentressangle is going extremely well and the company has the resources to successfully incorporate Con-way into the mix.
“We can chew gum, pat our head and jump up and down at the same time,” he said of his management team.
The early September departure of Hervé Montjotin as head of XPO Logistics Europe was predicated on the goal of having a lean team. Jacobs said he was an excellent manager, but there was no role for him, and added that the rest of ND’s management remains onboard.
Headquartered in Ann Arbor, Mich., Con-way operates 582 terminals and warehouses with about 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.
XPO will have a combined workforce of about 84,000 employees at 1,469 locations in 32 countries.
The acquisition of Menlo 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. Menlo Logistics, which also has a $200 million freight brokerage business and provides transportation management for goods worth $1.3 billion, is the 15th largest contract logistics provider in North America. It has about $600 million in revenue worldwide and is strong in the high-tech, healthcare and retail verticals. XPO entered contract logistics with the acquisition of ND, as well as Pacer International and New Breed Logistics in 2014, and will only be second to DHL Supply Chain in that space. Jacobs said the deal complements XPO’s expertise in aerospace, telecom, agriculture, chemicals, and food and beverages.
In September, XPO opened a contract logistics facility in Pennsylvania to support a Spanish-based retailer in expanding its U.S. footprint.
The tie-up is expected to strengthen XPO’s position in the e-commerce sector, which the company expects to grow at an annual rate of 18 to 21 percent.
Morgan Stanley has agreed to provide publicly traded XPO $2 billion to go with about $1.2 billion in cash the company secured from several institutional investors by selling them blocks of newly issued common stock the past year, 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 free cash flow.
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 nearshoring of manufacturing.
The combined company will boast a global ground transportation fleet of about 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.
“We have locations that are losing money; and locations that lose money get me upset because we’re not a non-profit company,” the CEO said. “And when you have hundreds and hundreds of locations worldwide and you have district managers managing dozens of them, and 45 are making money, and three to four are losing money, nobody notices so much. But we notice.
“So we’ve been doing stack rankings of all our locations globally and it’s surprising how many locations are making sub-optimal margins. So we have a profit improvement plan for all of those. We’re just fine-tuning the organization, improving the margins and finding ways to grow in all continents,” he said.
Larger, transformational deals will be pursued again in the medium term, once the balance sheet is improved and the ND and Con-way acquisitions are digested, he added.
Analysts said the deal should be a good one for investors.
“We think XPO turned to an LTL carrier instead of a LTL brokerage because of scale. Unlike truckload brokerage, where the industry has a few hundred thousand carriers, the LTL brokerage market is much smaller and XPO does not have the ability to drive efficiencies in LTL brokerage like it has in TL brokerage,” he added.
Stifel's Larkin said Menlo Logistics is an excellent match for XPO’s asset-light model.
“We feel Con-way’s predominately less-than-truckload model most appropriately fits XPO’s last-mile and contract logistics network given the more commonly shorter haul, lower density freight commensurate with XPO’s end-markets pertaining to consumers such as e-commerce. XPO will be able to leverage Con-way’s current client base to cross-sell logistics services through their existing platforms and networks, creating attractive revenue synergies,” he said.
“This industry is the last industry that hasn’t been consolidated yet, but should and will be consolidated,” Jacobs said. “And we believe we will be one of the winners in that consolidation and we will share, with one or two other companies, majority market share of the global transportation/logistics industry, and we will have a much better cost basis, and higher levels of service, and please customers better.”
This article was published in the October 2015 issue of American Shipper.