Divestments: change of plan at XPO Logistics
Change of mind, change of plan. XPO said yesterday that it won’t entertain any additional divestment ...
XPO Logistics chief Brad Jacobs was on Wall Street yesterday to ring the bell signalling daily trading at the New York Stock Exchange, chosen for the ceremonial act as it signals the start of trading in GXO, XPO’s spun-off contract logistics company.
This marks the final separation of XPO’s transport and contract logistics activities. While GXO comprises the XPO warehousing and contract logistics businesses, the transport management and trucking side continues under the XPO banner.
Mr Jacobs came to New York buoyed by the final quarterly balance sheet of the old company. On 28 July, XPO reported revenues of $5.04bn – a record second-quarter tally and 30.6% up on a year ago.
Owing to the Covid-induced shutdown, in the second quarter of last year XPO suffered a net loss of $132m, which turned into a $156m profit this year.
XPO management has attributed the strong result to the thriving e-commerce sector, its ongoing investment in technology and the signing up of some new large clients.
The improvement ranged across the company’s business sectors. Transport revenue soared 49.7% to a record high of $3.19bn. Truck brokerage revenue roughly doubled, to $598m, while LTL revenue broke through the $1bn barrier for a quarter for the first time.
On the contract logistics and warehousing side, revenues climbed 25.5% to $1.9bn. Operating income turned from a $43m loss inQ2 20 to a $71m profit this year. The division has recently garnered new contracts that should produce $300m in revenue in 2022 and 2023, according to management.
“We continued to execute extremely well in the second quarter, reporting near-record net income and the highest revenue and adjusted ebitda of any quarter in our company’s history,” said Mr Jacobs. “We’ve given our transport and logistics segments a strong springboard for the spin-off.”
In light of the strong results in both arenas, this may seem a strange time to spin-off contract logistics, but Mr Jacobs said in the past that cross-selling synergies between the two areas had not been as robust as anticipated.
Rather than build an end-to-end logistics behemoth, his focus has always been on the shareholder return aspect, where he felt that “the scope and complexity of the combined business weighed on the valuation of the transport business”, notably the LTL sector. He has argued that competitors in that arena had received better multiples from financial analysts, who prefer less complex business structures.
Wall Street responded favourably to separating the contract logistics side since the plan was announced late last year. Following the earnings call last week, several analysts affirmed their positive ratings and expressed confidence that the split would result in better transparency for the valuation of each business.
Nevertheless, the split creates some anomalies. GXO, touted by Mr Jacobs as the world’s largest ‘pure play’ contract logistics provider, is dwarfed on its turf by larger logistics firms like DHL or CH Robinson that offer contract logistics as part of a broader portfolio. The new XPO embraces an LTL operation and truck brokerage, usually associated with the truckload sector and seen as of little relevance in LTL.
Asked during the earnings call if he would consider selling the LTL business, Mr Jacobs declared it was not on the table.
XPO rose to prominence during a frantic expansion drive that saw 17 acquisitions in four years, culminating in the $3bn takeover of Con-way in September 2015. Since then the company has not made any further acquisitions. At the earnings call, Mr Jacobs did not rule out M&A, but said such a step would remain “in the back seat”.
He takes the role of chairman of GXO while remaining chairman and CEO of XPO, and it will be interesting to see how involved he will be in the running of the new entity, and how collaboration will shape up.
For now, shareholders should happy, which has always been a priority for Mr Jacobs.