In a short statement, UPS said that it had “entered into an agreement to sell its Coyote Logistics business unit to RXO, Inc., for $1.025bn”. Its reasoning was clear, with the sale motivated by the desire to position “itself to become the premium small package provider and logistics partner in the world, the decision to sell our Coyote Logistics business allows an even greater focus on our core business”. So, the sale is a continuation of the strategic repositioning that UPS started when it sold its road freight business, UPS Freight, in 2021.
RXO was more enthusiastic about the deal. In a briefing, Drew Wilkerson, chief executive officer of RXO, asserted that the “highly accretive acquisition of Coyote will immediately increase the scale of our brokerage business, providing customers with more capacity across a wider array of power lanes”. The transaction certainly makes sense for RXO. It transforms the company into the third-largest truck brokerage in the US and doubles its revenue. According to the numbers in RXO’s own presentation, RXO is more profitable than Coyote, with a gross margin of 15.4% compared to 14.5% at Coyote. The opportunity, RXO believes, is to reduce costs by around US$25m increasing EBITDA (Earnings Before Interest, Depreciation, and Amortisation). The purchase price is not huge, at a price/earnings ratio of 11.9.
The transformative nature of this deal for RXO is typical of Brad Jacobs, who is Chairman of RXO and the creator of RXO’s former parent XPO. The latter was built out of a series of acquisitions that made XPO one of the largest logistics providers in the world, at least before it floated off GXO and RXO. The combination of Coyote and RXO probably does make the market for truck brokerage more competitive, with a stronger player emerging to rival a troubled C.H. Robinson.
For UPS this is a big sale. The price is large but not overly generous, suggesting it is selling at the bottom of the market. Coyote used to return consistently strong results for UPS, however, the trucking market has changed, favouring owners of assets rather than brokers for the present. UPS is now a more focus company, with essentially just an express business combined with a contract logistics and forwarding business. It is assumed that UPS will not sell the latter.
Author: Thomas Cullen
Source: Ti Insight
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