CEO Bradley Jacobs of XPO Logistics (NYSE: XPO) is a serial entrepreneur who is probably more successful at what he does than most other executives.
He’s built up four other businesses from scratch, turned them into billion-dollar powerhouses, and then sold them at huge profits. He did it at oil brokerage firm Amerex Oil, oil trading company Hamilton Resources, garbage collection company United Waste, and industrial equipment rental giant United Rentals (NYSE: URI).
Image source: XPO Logistics.
He often achieves this success by rolling up an industry under his umbrella before selling the particular company at an enormous profit. All told, Jacobs has well over 500 acquisitions to his name, and it is part of the DNA of XPO, which has spent over $8 billion acquiring 19 companies since he took over in 2011, back when it was named Express-1 Expedited Solutions.
Yet the logistics and transportation leader just announced it was embarking on a different strategy: It wants to sell or spin off some of XPO’s businesses to maximize shareholder value.
Calculating the sum of its parts
Divestiture is not completely foreign to Jacobs or XPO. For example, the logistics specialist sold off its North American truckload operations in 2016. But the fact that a sale is so rare, and that acquisitions are so common, make the possibility of a sale or spinoff of a number of its businesses so unusual.
In a statement announcing the strategic review, Jacobs said the market was undervaluing the company, pointing out that despite XPO being the seventh best performing Fortune 500 stock over the last decade, “we continue to trade at well below the sum of our parts and at a significant discount to our pure-play peers.”
Because the market can’t appropriately value the disparate operations, the best way for XPO to return value to shareholders is to narrow its focus by possibly shedding some of the businesses through a sale or spinoff. One business that isn’t being considered for divestiture is the North American less-than-truckload (LTL) division, which handles small freight shipments.
According to The Wall Street Journal, the units that are up for review include XPO’s European supply chain, the North American and European transportation businesses, and supply chain operations in North America and the Asia-Pacific region.
Jacobs says XPO may not sell all of them and might not even sell one, but if it did shed all four units, he “would be CEO of a fast-growing, pure-play LTL company with a lot of liquidity.”
The changing logistics and transportation landscape
One of the reasons XPO has been able to make so many acquisitions in the transportation and logistics space is because it is a highly fragmented industry that lends itself to such activity. XPO Logistics has become the second largest freight brokerage and the biggest last-mile logistics provider for heavy goods in North America.
But Jacobs and XPO have eased back on their pace of acquisitions over the past two years, with the last major ones occurring in 2015 when it spent $3 billion for Con-way and $3.5 billion for French trucking outfit Norbert Dentressangle.
XPO was also knocked off its stride by the loss of Amazon.com (NASDAQ: AMZN) as a customer. While retailers, e-commerce companies, and various other businesses are counted among XPO’s customer base, Amazon was the biggest, with some $900 million in business.
The online retailer began maneuvering to develop its own logistics and transportation network and pulled two-thirds of its business from XPO. Now Amazon is running its own fleet of planes, trucks, vans, and even overseas shipping operations.
Business has also slowed for XPO, and in its third-quarter earnings report, it said full-year revenue was now expected to fall as much as 4% from the year-ago business, compared with its previous guidance for a range of down 1% to up 1%.
Nowhere else to turn
Having grown so large, there are few if any rivals that could buy XPO Logistics whole, as occurred when Jacobs sold United Waste to Waste Management (NYSE: WM). And with the industry slowing, fewer still would likely be willing to extend themselves to acquire the company.
That means selling off parts of the company could be one of the few levers Jacobs and XPO have left to improve shareholder returns for the immediate future and why divestitures rather than acquisitions will likely be in XPO’s future.
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