That has led some analysts to ask the question: If things are so good, why think about breaking up the company?
Brandon Oglenski of Barclays, on XPO’s earnings call with analysts Tuesday morning, tackled that question head on. Given XPO’s plan to use 10 separate “levers” to drive improvements in EBITDA of up to $1 billion over the next few years, why not continue to “chase” that “instead of breaking up?”
And in response, XPO CEO Brad Jacobs said what he has said numerous times: It’s all about shareholder value and the conclusion that XPO is facing a “conglomerate discount” in which the value of its individual parts is greater than the sum of its parts as reflected in the price of its stock.
“We are always focused on creating tremendous shareholder value,” Jacobs said in his first earnings call since the mid-January announcement of the strategic plan that might see all XPO units except its LTL division spun off or sold. “The possibility to continue as an intact company with the proper improvements is very attractive, quite frankly, and that is not a bad plan B.”
But Jacobs wants to create better shareholder value in the “here and now,” he said. “We trade as a discount to the sum of our parts and therefore if we take these four business units and market them as sales, there is a very good chance we are going to get multiples that will exceed by a substantial amount what we trade for.”
While Jacobs talked about the company’s multiple to EBITDA, by another standard XPO has lagged. For example, if it compares itself to Old Dominion Freight Lines (NASDAQ: ODFL), that company is carrying a 28.8 price-to-earnings ratio. XPO carries about a 25.25 ratio.
Skepticism of the breakup plans was inherent in a comment made by the transportation research team at Morgan Stanley, led by Ravi Shanker.
“We understand the mathematical logic, but the strategic logic is still confusing,” the team wrote. “The operating performance in the quarter shows the XPO strategy is working and there are benefits (whether it be operational efficiencies, cross-selling or eliminating back-office redundancies) of having these businesses together. We would expect this to remain a topic of discussion for the foreseeable future.”
During the call, Jacobs said cross-selling across the units was picking up. “We still see a significant and growing amount of cross-selling within North American transportation and within European transportation,” he said. “I would say the momentum of cross-selling within North American transportation is increasing.”
XPO, in its initial announcement of its strategic review, did not say what units would be considered for sale, except for the plan to keep LTL. The North American Transportation unit includes the company’s brokerage, final-mile, managed transportation and intermodal activities. It would be expected that if North American Transportation were sold or spun off, it would be as an integrated operation.
The company also has extensive European activities that are part of the strategic review.
Amit Mehotra, who leads the transportation research unit at Deutsche Bank, asked about the benefits of spinning off a unit versus selling it to a third party. But Jacobs did not want to talk about spinning off anything, noting separately that the first efforts to find buyers were “off to an excellent start.”
As Mehotra noted, spinning off a business doesn’t take another party to step up; it’s “completely your control,” he said. But Jacobs said for now, “we’re not putting a huge amount of effort into the spin.” Rather, XPO is looking at the sales opportunities, “and we’ll see how that goes and then take it step by step.”
Allison Landry of Credit Suisse asked Jacobs whether the uncertainty surrounding the fate of some of XPO’s operations had impacted levels of business. Jacobs’ response: “A little bit, but not a lot.” He said there had been “a little bit of delays in some customers but not a big trend.”
In other highlights from the call:
–XPO on Monday, the same day the earnings were released, announced the hiring of a new CFO, David Wyshner. Wyshner has extensive experience in the type of spin-offs and asset sales that XPO is looking at in its strategic review. According to a note from the Deutsche Bank team, he was an executive at Cendant when it split into four units in 2005-06; was CFO at Avis when it made two significant acquisitions; and was CFO of Wyndham Hotels, which split itself into three separate companies. “This experience is highly noteworthy in the context of XPO’s ongoing strategic alternatives process and, in our view, strongly supports [management’s] proactiveness in maximizing equity value,” Deutsche Bank wrote.
–Jacobs said the LTL segment had suffered from a weak industrial economy but that there had been signs of improvement. “We do see some potentially encouraging signs in January and year-to-date numbers, where in LTL, tonnage is definitely still down, but it’s down less than it was in the fourth quarter,” Jacobs said, according to a transcript of the call provided by Seeking Alpha. Yield has increased and is now more than it was in the fourth quarter, he added. “There’s some encouraging signs about what’s going on in the industrial economy.” While the LTL division’s adjusted operating ratio of 82.3% was a record in the fourth quarter, it benefited from land sales that went into the final number.