Snapshot: XPO execs answer investor queries – while STG deal rumours swirl

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Brad Jacobs, Mario Harik, Drew Wilkerson, Matt Fassler, Tavio Headley, Aroon Amarnani and Kevin Sterling of US-based XPO Logistics answered questions from investors earlier this week following a recent break-up announcement – just as, incidentally, several sources in our marketplace suggest that one (yet to be revealed) unit of XPO is rumoured to be about to agree a deal with STG Logistics.

One senior contact was adamant “something will happen there” while another wondered: “You got anymore dirt on this XPO + STG deal? Those rumours are flying hot now.”

(PS: On Friday, the day after this post was originally published, XPO Logistics announced to have sold its intermodal business to STG Logistics; It added: “$710 million divestiture advances XPO’s strategic plan to create two pure-play, publicly traded companies through a spin-off later this year.” Moreover: “The intermodal unit, which XPO has reported as part of its Brokerage and Other Services segment, generated $1.2 billion of revenue in 2021. The divested operations provide rail brokerage and drayage services; 48 locations and approximately 700 employees have transferred to the buyer in the transaction.”)

Some key topics discussed by management – and concerning the strategic plan, LTL and truckload brokerage – follow.

1. Can you walk through the planned spin-off structure at a high level?

2. XPO: We’re spinning off our brokered transportation services platform as a separate publicly traded company. It will be a tech-enabled platform comprised largely of our North American truck brokerage business —upwards of 80% of the operating income of SpinCo will be from truck brokerage. The other services are complementary and asset-light — managed transportation, which is integrated with brokerage already, global forwarding and our last mile network for home delivery of heavy and bulky goods. That’s SpinCo in a nutshell.

RemainCo will be a pure-play LTL business, something investors have been looking for.

In addition, we’re planning to divest two other businesses: North American intermodal, which provides rail brokerage and drayage services, and our operations in Europe. We’re running a dual process for the European business for either a sale or an IPO.

3. Out of all the different strategies you could have implemented, why another spin-off?

4. XPO: We determined it was the best operational decision for our stakeholders, which include our customers and employees, and the best way to create value for our shareholders. Operationally, it’s about fit and focus. The two businesses are different animals, and what we learned from GXO is that management can run a standalone business more effectively if it’s not part of a conglomerate. It makes sense to have LTL be a pure-play. It’s an assetbased, network business levered to the industrial sector. Our brokered transportation group, which is primarily truck brokerage, is asset-light and a technology play, more levered to the consumer sector. The separation should also help the investment community recognize the value we’ve built into both parts of the company. A number of investors like the durable franchise associated with an asset-based LTL pure-play, and have been seeking out another name to express this view.

Our peers trade at about 12x to 18x EBITDA. C.H. Robinson is our closest brokerage peer and has traded at 12x to 15x EBITDA for most of the last 10 years. They’re bigger than we are and a formidable competitor we respect a lot, but we’re more profitable, with more growth and we’ve been investing in cutting-edge technology for a longer time.

When you factor in the debt we plan to pay down with divestiture cash, with the goal of investment-grade, we believe the aggregate stock price of the two separate companies could be trading in the range of 12x to 15x adjusted EBITDA. At that level, the aggregate price would be nearly double XPO’s current stock price. So, the financial thought process behind this plan was extremely compelling to us, and taking the operational benefits into account, it was something our board of directors believed we really had to do.

5. So, by separating brokerage, you’re enabling a premium valuation on an asset that isn’t embedded in the current EBITDA multiple, because people are so focused on LTL?

6. XPO: Very well said — and we agree with you. It parallels our logistics segment before the GXO spin. The Street didn’t appreciate that business, didn’t understand it, didn’t pay much attention to it, and now they do.

7. Is this a complete departure from your M&A strategy?

8. XPO: Our strategy is, and has always been, to create immense shareholder value. That focus made us the 7th best-performing stock of the Fortune 500 over the last decade. During that period, we bought 18 companies and integrated and optimized them. We also sold off parts of those acquisitions, most notably the Con-way truckload unit for about $550 million. And we greatly increased the profitability of the operations we kept. We also bought back $2 billion of our stock at one point in the cycle. So, we’ve remained nimble and opportunistic, and given what we’re seeing in the current industry environment and investment community, we believe this step is the best way to continue to create outsized shareholder value.

9. What’s the customer reaction to the spin been like so far? How have your employees responded to the news?

10. XPO: It’s been positive. Customers like pure-plays, because pure-plays are focused. Our LTL employees are also happy with the news, and excited about our plan to grow revenue. Our brokerage employees are also excited about being more in the spotlight with the spin-off than is possible in the conglomerate.

11. How should we think about upcoming milestones?

12. XPO: The main milestones in the timeline for a fourth quarter spin-off will be getting the Form 10 registration statement filed and declared effective by the SEC, filling out the management team with some key additions, creating a new brand, and forming a new board of directors. There’s a lot of other work to do, but those are some of the big ones. We also have the divestitures of intermodal and Europe on our to-do list.

More can be be found here.