Project Description

XPO Logistics Spin-off Notes

August 16, 2021 – Update

December 10, 2020 – Update

December 3, 2020 – Update

  • On December 2, 2020 after the market close, XPO Logistics announced that its board of directors has unanimously approved a plan to spin off 100% of its logistics segment.
  • Here is a great interview with XPO CEO Brad Jacobs about the rationale for the spin-off.
    • Over the past year have done some sole searching as a company to determine how it could unlock value as its trading at a large conglomerate discount.
    • Heard two things from shareholders:
      • Have to simplify the structure so its’s easier to understand.
      • You have to get to be investment grade.
  • After a thorough strategic review, the board of directors determined the best path to create more shareholder value is to break the company up into two separate public companies.
  • The spin-off:
    • Second largest contract logistics provider in the world
    • The executives currently leading XPO’s global logistics segment will continue to serve in senior positions with NewCo.
    • Post-separation, NewCo will be the second largest contract logistics company in the world, with approximately 200 million square feet of warehouse space. The business will comprise:
      • A range of innovative services enabled by intelligent technology, including high-value-add warehousing, omnichannel fulfillment, reverse logistics, cold-chain logistics and supply chain optimization;
      • The largest outsourced e-commerce fulfillment platform in Europe, with burgeoning e-commerce and reverse logistics services in North America; and
      • XPO Direct™, a shared-space distribution network in North America with the flexibility to reposition customer inventories close to demand.
    • As of September 30, 2020, XPO had asset-light logistics operations in 27 countries, with approximately 58,000 employees and 766 locations.
    • XPO’s logistics business has been a consistent, double-digit compounder: 2017–2019, the
      company grew its adjusted EBITDA in logistics at a CAGR of 12%, with an average 8%
      revenue CAGR.

  • XPO RemainCo:
    • A global provider of less-than-truckload (LTL) and truck brokerage transportation services.
    • Brad Jacobs will continue to serve as chairman and chief executive officer of XPORemainCo, and will become chairman of the NewCo board; Troy Cooper will continue to serve as XPORemainCo’s president.
    • XPORemainCo will be a top provider of freight transportation, primarily LTL and non-asset truck brokerage — these two services currently account for approximately 90% of adjusted EBITDAThe business will comprise:
      • The third largest provider of less-than-truckload (LTL) transportation in North America, with an industry-best improvement in adjusted operating ratio over the five years of XPO ownership; and
      • The second largest truck brokerage provider worldwide, with a digital brokerage marketplace that has the fastest carrier adoption rate in the industry.
    • As of September 30, 2020, XPO had transportation operations in 17 countries, with approximately 38,000 employees and 724 locations.
    • With respect to transportation, XPO expects XPORemainCo’s multiples to be at least as high as those of comparable peers, due to an ability to outperform:
      • In LTL, 2015–2019, XPO improved its operating ratio by more than 1,000 bps, which was 2.5x better than the second-best performer; more than doubled EBITDA; nearly tripled EBIT; and improved its operating ratio in 17 of the last 19 quarters.
      • In brokerage, XPO grew North American net revenue 2017–2019 at a compounded rate of 11%, vs 5% for its leading competitor, despite the loss of business from its largest customer.
      • During the same two years, XPO grew its brokerage adjusted EBITDA at a 14% compounded rate, vs. 1% for its leading competitor.

    • If XPO was valued at an average of the multiples of peers, even at the low end of the range,
      the company believes that is stock price would be significantly higher today.
    • Best comps for RemainCo:
      • DHL. Division of Deutsche Post. Deutsched Post trades at 7.7x forward EBITDA but I don’t know if the entire company is a good comp for XPO RemainCo.
      • Old Dominion. Old Dominion Freight Line is the third- largest less-than-truckload carrier in the United States. Trades at 20x forward EBITDA. 38x free cash flow.
      • DSV. Denmark based logistics company. Trades at 18.4x forward EBITDA.
  • Rationale for the spin-off:
    • The spin-off is effectively a clear-cut separation of XPO’s two reporting segments, both of
      which are industry leaders in their own right. Each business outperforms the competition on
      key metrics.
    • Even so, many peers trade at large EBITDA multiple premiums to XPO, even though XPO has higher growth rates, higher margins and greater free cash flow conversion.
    • The company’s outperformance needs to be more obvious – and it would be, as two, focused,
      independent pure-plays without the conglomerate overhang.
    • The company believes that XPORemainCo and NewCo would be comp-ed against the right
      peers – the other industry leaders in LTL, truck brokerage and contract logistics – unlocking the value that has been trapped within the XPO conglomerate and thereby benefitting both
      companies and their stakeholders.
  • The spin-off is expected to be tax free.
  • The transaction is expected to be completed in the second half of 2021.
  • Background on XPO:
    • Good WSJ articles  on spin-off and short seller allegations.
      • XPO Logistics grew quickly through a series of acquisitions from 2012 to 2015 when it bought 17 US and European companies.
      • Was a Wall Street darling until Spruce Point Capital published a short report alleging aggressive accounting.
  • Sum-of-the-parts. Credit Suisse thinks the company is worth $179 if it trades in line with peers.

January 15, 2020 – Update

  •  XPO Logistics (XPO) has disclosed that it was exploring strategic alternatives, including a sale or spin-off of one or more of its business units.
  • XPO has been an excellent stock, but management argues that it is still selling for a discount to its sum of the parts valuation.
  • XPO trades at 9.0x forward EBITDA and management believes each segment would trade at a higher multiple on its own. Segments include: logistics (35% of sales), freight brokerage and truckload (28% of sales), less than truckload (28% of sales), last mile (6% of sales), and managed transportation (3% of sales).