XPO Logistics begins the process of (maybe) breaking itself up

The end of XPO Logistics, Inc. as the transport and logistics industries have come to know it may be at hand.

The $17 billion giant (NYSE:XPO) has begun entertaining possible acquisition offers for four of its units: its two North American and two European transport and logistics businesses. Failing to execute a sale or sales that XPO finds satisfactory, the company may spin off one, two or all four of the units. The North American less-than-truckload (LTL) operation will not be sold or spun off, the company said. XPO has retained Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC as its financial advisers, and Wachtell, Lipton, Rosen & Katz as its legal adviser.

In an interview late Wednesday two hours after the announcement, Brad Jacobs, XPO’s founder, chairman and CEO, left open the real prospect of XPO eventually evolving into a pure-play LTL operator with no debt and an enormous pile of capital.

The company stressed in its announcement that nothing may come of the sale or spinoff discussions, and that there is no time frame for deals to be consummated, if they are at all. However, the tenor of Jacobs’ comments appear to make a do-nothing outcome unlikely. Jacobs is hell-bent on enhancing shareholder value, saying it is no longer acceptable that XPO’s shares trade at a significant discount to its pure-play peers, despite a 10-fold rise in the company’s stock price since 2011.

XPO currently trades at 9.3 times earnings before interest, taxes, depreciation and amortization (EBITDA). According to Jacobs, Old Dominion Freight Line Inc. (NASDAQ:ODFL), a pure-play LTL carrier and arguably the segment’s best-run operator, trades at 13.5 times current EBITDA. Saia Inc. (NASDAQ:SAIA) another well-run LTL player, trades at about 10 times EBITDA, Jacobs said.

Ben Gordon, who runs a transport and logistics merger and acquisition firm, added that companies such as C.H. Robinson Worldwide Inc. (NASDAQ:CHRW) trade at 12.5 times EBITDA, Expeditors International (NASDAQ:EXPD) trades at 14.8 times EBITDA, UPS Inc. (NYSE:UPS) trades at 15.6 times EBITDA, and FedEx Corp. (NYSE:FDX) trades at 16.3 times EBITDA.

XPO’s announcement could radically change the direction of a company that was built upon the acquisition and integration of 17 companies between 2011 and 2015. By the time it completed its last acquisition, the $3 billion purchase in September 2015 of LTL and logistics company Con-way Inc., XPO was as close to a conglomerate as could be found in transport and logistics. It today operates in warehousing, freight brokerage, intermodal, last-mile, managed transportation and LTL, with massive operations in North America and across most of Europe. It also had a truckload business, which Canadian firm TransForce bought in October 2016.

Jacobs has long touted the cross-selling opportunities inherent in such a broad-based menu, noting that most of its largest customers use multiple XPO products and services. In Wednesday night’s interview, Jacobs said most of the cross-selling benefits arise within North American and European transport units. There isn’t as much cross-selling between the company’s transport and logistics operations, or between the North American and European regions, Jacobs said. A buyer of either transport unit — if one or more materializes— could offer the same cross-sell value to shippers that XPO does now, he said.

Jacobs argued that shareholder value has not been enhanced by the roll-up strategy, noting that XPO’s share price has been weighed down by what he called a “conglomerate’s discount.” Wall Street, he said, prefers, “easily digestible” and easy-to-understand stories, and often rewards those stories with valuation premiums.

The reward was not long in coming. As of 7 p.m. EST in after-hours trading, XPO shares were up nearly 17%, an increase of more than $16 a share from Wednesday’s close to nearly $97 a share. Amit Mehrotra, Deutsche Bank’s lead transport analyst and arguably Wall Street’s biggest bull on XPO, said Wednesday night that the announcement could potentially create $3.6 billion in shareholder value, equivalent to about $32 a share.

Jacobs said his goal all along has been to improve the lot of XPO shareowners, and that those who thought he was on a mission to become the king of transport and logistics have likely misread his intentions. “We are not entrenched management, and we are not empire-builders,” he said.