Business & Investment

XPO-GXO Spin-off Saga: “Let’s meet at a crossroads”

Blood Jacobs hasn’t been denied much while being one of the most accomplished business careers in the last 40 years. Judging by the fact that Jacobs wanted to set up a $ 5 billion business, he accepted it. Three of them have become very successful publicly traded companies.

But ten years after Jacobs founded XPO Logistics Inc. (NYSE: XPO), one of the billion-dollar babies, Jacobs fled when his company was Old Dominion Freight Line Inc. It is mentioned in the same way as. (NASDAQ: ODFL). ), Saia Inc. (NASDAQ: SAIA) and CH Robinson Worldwide Inc. (NASDAQ: CHRW).

All three trade with a higher rating than XPO and are all played in the XPO sandbox. Robinson is the largest freight broker in the country. LTL carriers Old Dominion and Saia operate trucking brokerage businesses, but neither company is too small to move the needle. In contrast, Jacobs maintains strong mediation and LTL operations at XPO, both of which are thriving.

Jacobs rings the bell on the New York Stock Exchange at 9:30 EST on Monday, embarrassing his 65th birthday, and begins trading at XPO’s one-time GXO Logistics Inc. (NYSE: GXO). I will let you know. Logistics business spun off by shareholders.

When he leaves Ringer, Jacobs, as Chairman and CEO, runs a “pure” transportation company, leaving contract logistics operations to another public company. He also gave Wall Street the remaining XPOs equal to or better than their richer rewarded rivals by presenting investors and analysts with a simpler roadmap than older XPOs. You need to convince yourself that you should be.

Pre-spin XPOs were typically given multiples of late single digits to low single digits for interest, taxes, depreciation and profit before amortization (EBITDA). Multiples of Old Dominion, Saia and Robinson were higher than usual. For example, Old Dominion and Saia shares are trading today at 20x and 15.6x their respective 2021 EBITDA.

Jacobs’ message over the years has been that XPO has been punished with multiple compression “conglomerates” because there are too many moving parts for investors to properly and accurately evaluate. Jacobs believes that this strategy will help post-spin XPO escape the penalty box by separating the two businesses into independent, easy-to-understand models.

It promises to be an interesting vehicle. GXO, chaired by Jacobs but not run daily, maintains an investment grade credit rating from the beginning. GXO will be the world’s largest pure play contract logistics company, but in reality its rivals in tight spaces are small businesses. Large contract logistics providers like DHL Supply Chain are some of the companies that offer other services.

XPO will not open the door with an investment grade rating, but a company spokesman said it plans to reach that status shortly after the spin-off. Jacobs told analysts the following Thursday that the acquisition, which was at the heart of the strategy that led the company to this point, would lag behind de-leveraging to meet investment grade criteria. XPO has announced its final quarterly financial results as an integrated entity. The results were excellent and XPO set a quarterly record for revenue and EBITDA. XPO has also raised its full-year earnings forecast for the transportation and logistics segment.

Amit Merotra, a long-time Deutsche Bank analyst whose tendency to raise inconvenient truths has won the respect of grudge and perhaps hostility in the Transport C Suite, wonders if XPO still feels the weight of the conglomerate after discounting. I thought. Mehrotra asked Jacobs if they would like to abolish the brokerage and final mile businesses. Both are performing at a high level and can make a fair amount of money on the market, but it may be a way to raise multiples of XPO to the level of a pure LTL provider. ..

Jacobs replied that XPO has no plans to sell its non-LTL business and will not be overwhelmed by the horrific “discounts.” Jacobs preached patience and advised everyone involved to look beyond the first two weeks of the deal or so.

Spin-offs also cause some interesting scenarios. For one thing, not many individuals chair two large public companies. At GXO, will Jacobs act as a traditional hands-off chairman, or will he become more involved in the business he has been doing? An XPO spokesman cites the billions of Michael Dell, who heads the board of directors of technology companies Dell Technologies Inc. (NYSE: DELL) and VMWare Inc. (NYSE: VMW), with two chairs. He said there is an example of an executive serving.

There is a cross-selling issue. Do XPO account executives feel pressure to direct their customers to GXO if they want contract logistics services? The ability to sell a broad transportation and logistics portfolio has been an important part of XPO’s value proposition throughout the second half of the last decade. However, Jacobs said in recent years that most of the cross-selling has occurred not in the entire transportation and logistics business, but in the transportation portfolio where LTL customers may want final miles and intermodal coverage.

Jacobs will also deal with the Team Stars Union, which XPO has blocked for 10 years, but recently secured the first two collective bargaining agreements with the company. The union believes there is momentum to further organize in XPO, but Jacobs faces an irreplaceable enemy.

A successful spin-off is not a slam dunk to perform. Still, finding an analyst to bet on Jacobs, if not a strategy, can be very difficult. Cowen & Co. Jason H. Seidl confirmed XPO as a “top pick” on Thursday after receiving second-quarter results and subsequent analyst calls. LTL is at the optimal macro spot, and XPO’s technology investment will have significant consequences for the digitization of manual and efficient processes, Seidl said.

Encouraged by GXO’s “robust business pipeline,” Seidl added, “We not only continue to grow into our new customer base, but we also have the ability to grow our business within our current customer base.” Analysts have a 12-month price target of $ 169 per XPO share. Friday’s share price fell 1.6% to $ 138.69.

Todd Fowler, an analyst at KeyBanc Capital Markets, said the spin-off “simplifies the reporting structure” and “may improve coordination between shareholders in terms of service delivery, final market and geographical exposure.” .. “We look forward to greater transparency around us,” Fowler added. [the] Ratings assigned to each business after the actual spin. Still, he said, the relative valuation of the company after the merger is also attractive. Fowler has set a 12-month target of $ 175 per share, assigning shares an “overweight” rating.

The Fowler research note headline talked about a volume about what’s going to happen on Monday and what’s ahead: “Let’s meet at the crossroads.”

XPO-GXO Spin-off Saga: “Let’s meet at a crossroads” XPO-GXO Spin-off Saga: “Let’s meet at a crossroads”

Back to top button