Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

If you're not yet familiar with XPO Logistics Inc. beyond overtaking its trucks on highways, it's a good time to get acquainted.

Shares in the Greenwich, Connecticut-based logistics company, which counts Ikea and Home Depot Inc. among its customers, reached a record on Friday, giving it a market value of almost $9 billion. That's impressive considering that just four years ago the company was a shadow of its current self with a market capitalization that hadn't yet cracked the $1 billion mark.

In early 2014, Chairman and CEO Bradley Jacobs trumpeted a growth plan that involved hitting targets of $5 billion in revenue and "several hundred million" dollars in earnings before interest, taxes, depreciation and amortization by 2017. Thanks to two hefty mergers in 2015, XPO was able to hit its 2017 goals well ahead of schedule. Looking back, we at Gadfly give them a "slam dunk", the highest available grade in our Hindsight 20/20 system.

Deal Scorecard
The two major acquisitions that XPO Logistics struck in 2015 have been transformational
Source: Bloomberg
*Before figures are at the end of 2013 ^After figures for revenue, Ebitda, profit margin are projected full-year 2017 figures; market capitalization figures are as of 11/17

Specifically, XPO's two large 2015 acquisitions were its more than $2.6 billion purchase of a majority stake in French rival Norbert Dentressangle SA in April, followed swiftly by the $3 billion purchase of of trucker Con-way Inc. in September. 

Bienvenue
XPO's deal spree has given it a much more diversified revenue base. That has been welcomed by most shareholders.
Source: Bloomberg

As a result of those two bites, which were padded by almost a dozen smaller purchases since 2013, the company was able to turn its first-ever profit in 2016. That achievement was made possible in part by increased bargaining power with suppliers thanks to its newfound size, the ability to cross-sell its breadth services to new customers obtained through its string of transactions and a large investment in technology to resolve operating inefficiencies. 

Chunk of Change
As it has grown, XPO Logistics has increased its capital expenditures, especially on technology. That in turn is improving pricing, labor productivity and trailer utilization.^
Source: Bloomberg
^This year, its spending on technology will total $425 million

Importantly, although Wall Street initially looked unfavorably on XPO's purchase of Con-way, the company's bet on less-than-truckload shipping, which combines goods from multiple customers in each trailer, has paid off. It's been able to improve that unit's profitability in part by achieving at least $170 million in cost savings. And tweaking that business's pricing structure has also led to improved margins. 

Separately, bulking up in the area of heavy-duty last-mile delivery -- which can also involve the installation and removal of furniture or appliances -- has been a boon for the company as consumers have shifted toward e-commerce. It helps that FedEx Corp. and United Parcel Service Inc. have shown little interest in getting into the heavy-duty game.

To be sure, XPO's growth hasn't come without a cost: The company's debt load is a multiple of roughly 2.9 times its Ebitda, which is more than double the burden borne by most U.S. industrial companies. Still, its strong free cash flow levels -- set to jump to $630 million in fiscal 2018 -- should help hasten the repayment of those borrowings. 

Pedal to the Metal
As the benefits of XPO Logistics's string of acquisitions have become clearer, investors have piled in, propelling the stock to record territory
Source: Bloomberg

The reality is that XPO's dealmaking days aren't over, even though analysts including those at Goldman Sachs Group Inc. acknowledge that the company doesn't need to lean on M&A for future growth.

After taking a break from M&A for two years, Jacobs has said XPO is interested in expanding in contract logistics, which involves tasks such as supply chain planning, warehousing, inventory management and transporting and distributing goods. He's said that the company is running the ruler over targets that are producing Ebitda of at least $500 million, so any transaction would be sizable and -- in the interest of keeping a lid on debt -- would most likely involve a form of stock-based payment. It's unclear exactly how these closely held companies are performing or whether they'd be open to a sale, but Pennsylvania-based Penske Logistics LLC, Netherlands-based CEVA Logistics (which is backed by Apollo Global Management LLC) or even DB Schenker, Rhenus SE & Co. or Fiege Logistik Stiftung & Co. -- all from Germany -- could be potential targets.

Regardless of what XPO's next deal binge looks like, Jacobs's credentials and amount of skin in the game should give investors a level of comfort that's not easily matched. The mere incentive to boost, let alone preserve, his 15 percent stake worth some $1.4 billion should ensure that he steers clear from transactions that destroy shareholder value.  Will future bets be slam dunks? We'll see, but the track record is good so far. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Also, although this isn't in contract logistics, XPO could target Hub Group Inc. to bolster its intermodal business, making it a stronger competitor to JB Hunt Transportation Services Inc. 

  2. Jacobs's stake is based on proxy filing data and accounts for the conversion of preferred stock and warrants.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net