Go big, or go home: XPO divests FTL business

Brad Jacobs and the management team at XPO Logistics have got around to doing something that has been under discussion for some time now – disposing of the FTL business they acquired as part of the company’s deal to take over US trucking company Con-Way last year.

Reportedly the 19th-largest FTL business in the US, the divested operation was sold to the Canadian company TransForce for $558m. It is comprised of around 3,000 tractors, 7,500 trailers and 29 facilities.

Following its acquisition of Con-Way, XPO Logistics took a significant hit to its share price. Investors were spooked by the amount of debt taken on by the company, and unsure about the feasibility of integrating two major acquisitions (the first being Norbert Dentressangle) in such a short space of time.

At the end of 2015, following the Con-Way acquisition, XPO Logistics had amounted a net debt of -$7.7bn, and was still not profitable. Though the company has markedly improved its margins, the sale of the Con-Way FTL business nonetheless represents a convenient means of helping the company pay off its debt.

Furthermore, in an operational sense, Con-Way’s FTL business has never been of great interest to XPO. Before and after its takeover of Con-Way, the company has instead focussed its resources on strengthening its position within markets in which it is already near the top of the food chain. Ultimately, XPO Logistics’ position in the US FTL industry, which is highly competitive, was too small.

Within North American road freight, XPO has established itself as a leader in FTL, brokerage, last mile and drayage operations, and the company’s management has elected to build from a position of strength in each of these areas. This has been a consistent strategy of the company for some time, and a hallmark of company CEO Brad Jacobs for many years; use debt to buy several strong businesses, combine them to form a single large player, exploit overlapping synergies to enhance networks and eliminate costs, and drive industry consolidation. Given the wider strategy of the company, divestment the FTL business was logical.

As for the acquirer, TransForce has pursued an aggressively expansionist policy of late, which has revolved around bolt-on acquisitions. The largest player in the Canadian trucking industry, the company is set on building its network in a southward direction, and this latest takeover represents a continuation of this policy.

TransForce has had to adapt recently, in order to weather the storm caused by rock-bottom oil prices. The company had counted services to the Canadian oil & gas industry as a small revenue stream, but management elected pare down its operations in this business in line with the market. Moreover, TransForce agreed to sell its waste management business in October 2015, for C$800m, meaning that the company has repositioned itself around conventional logistics operations.

Truckload was already the company’s biggest revenue segment prior to acquiring XPO’s FTL business, and accounted for 39.4% of TransForce revenues during 2015 (C$1,614m, approx. US$1,265m). Combined with the XPO FTL operation, the division is likely to increase its revenues by around 50%, putting it in the top echelon of North American FTL carriers.

Both companies are betting big on the back of acquisitions: TransForce is making a big play in the FTL segment; XPO in LTL. As such, the transaction is a convenient deal for both parties. Both are diversified businesses that have grown quickly over recent years, and each is a major player in at least one field. It will be interesting to follow the fortunes of both XPO and TransForce, as the trucking market in North America continues to struggle.

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Source: Transport Intelligence, November 7, 2016

Author: Alex Le Roy