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XPO Inching Way Back Into The M&A Game, Jacobs Tells Analysts

FreightWaves

Brad Jacobs, chairman and CEO of transport and logistics provider XPO Logistics, Inc., (NYSE: XPO) appears to have reopened the door to mergers and acquisitions (M&A) activity, if only just a crack.

Jacobs told analysts at Morgan Stanley & Co. (NYSE: MS) in a recent meeting that he is now devoting about 10 percent to 15 percent of his time to exploring possible acquisitions, according to a September 26 note from the investment firm. Though this may not seem like a lot given XPO's acquisitive history, it marks a turnaround from February, when XPO tabled M&A activity for the foreseeable future because a mid-December plunge in its stock price had made share buybacks a more cost-effective use of its capital. The company has spent about $1.9 billion of the $2.5 billion it was authorized to buy back shares. 

According to the Morgan Stanley note, XPO management will focus on smaller, tuck-in acquisitions instead of larger deals. It will likely steer clear of freight forwarding due to secular disruptions in the segment, and it is neutral on freight brokerage deals because of declining gross margins, although it believes that the growing applications of information technology will help defend operating margins, according to the note.

The company will not meaningfully increase its debt leverage or issue equity to finance a potential purchase, Jacobs and his investor relations head, Tavio Headley, told the analysts, based on the note. The company is in the "early stages" of feeling out interested companies and conducting "fact-finding" and "relationship-building" activities, according to the note. Neither Jacobs or other company executives responded to requests for comment.

At FreightWaves' Transparency19 conference in May, Jacobs disclosed that XPO had been close near the end of 2018 to consummating a massive acquisition that would have effectively doubled the company's size. Jacobs has never taken M&A completely off the table, and has said XPO would have pursued deals had its share price not dropped so appreciably when it did.

XPO's share prices have fluctuated wildly over the past 52 weeks, peaking at $116 per share last September and falling to $41 per share earlier this year in the wake of several quarters of disappointing financial results and the lingering effects of a scathing short-seller's report last December questioning the company's accounting methods and managerial competence. Shares today closed at $70.76.

Jacobs used an aggressive roll-up strategy to transform XPO from a $100 million company in 2011 to a $17 billion behemoth today. XPO acquired and integrated 17 companies in four years, an unprecedented development in the transport and logistics sector. It has been on the M&A sidelines since September 2015 after acquiring transport and logistics firm Con-Way Inc. for $3 billion.

XPO continues to experience difficult macro conditions in the U.S., the U.K. and France, and that demand will remain weak until the U.S.-China trade dispute is resolved and it becomes clear how, or if, Britain exits the European Union, the Morgan Stanley analysts said. The company is focused on cutting its $6.5 billion a year labor spend through technology investments, and sees the potential for hundreds of millions of dollars in cost improvement through route optimization and warehouse automation, according to the note.

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