XPO Logistics To Spin-Off Its Logistics Segment Into A Separate Publicly Traded Company
On December 2, 2020, XPO XPO Logistics, Inc. (NYSE: XPO, $120.33, Market Capitalization:$11.0 billion), a top ten global logistics provider of cutting-edge supply chain solutions, announced that its board of directors has unanimously approved a plan to pursue a spin-off of 100% of its logistics segment into a separate publicly traded company. XPO intends to structure the separation as a tax-free transaction to XPO shareholders and would result in XPO shareholders owning stock in both companies. Previously on 1/15, the company had announced a review of strategic alternatives, including a possible sale or spin-off of one or more of its business units. After a thorough examination of all strategic alternatives, the XPO board decided that the optimal path to unlock aggregate equity value is to create two independent companies that are each well-equipped to capitalize on secular growth trends in their sectors.
Upon completion, the spin-off will create two separate businesses with clearly delineated service offerings: XPORemainCo, a global provider of less-than-truckload (LTL) and truck brokerage transportation services; and NewCo, the second largest contract logistics provider in the world. Both companies are expected to trade on the New York Stock Exchange. Also, if the spin-off is completed as expected 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; and the executives currently leading XPO’s global logistics segment will continue to serve in senior positions with NewCo. The company expects the transaction to be completed in 2H21, subject to various conditions, including the effectiveness of a Form 10 registration statement, receipt of a tax opinion from counsel, the refinancing of XPO’s debt on terms satisfactory to the XPO board of directors, and final approval by the XPO board of directors. XPO has retained Goldman Sachs & Co GS . LLC as its financial advisor and Wachtell, Lipton, Rosen & Katz as its legal advisor to assist with the spin-off process.
Looking at the background of the transaction, in January 2020, XPO had announced a possible sale or spin-off of one or more of its business units. However, in March 2020, the company had to abandon its plan to break up the company, as the market condition worsened due to the COVID-19 pandemic. Also, it was reported by Bloomberg in October, that XPO Logistics was possibly looking to sell its European supply chain business. Later in November, it was reported that Blackstone Group Inc. BX , which was viewed as a “key bidder” for the XPO unit, had dropped out of consideration, due to a disagreement over valuation.
Post-separation, 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 EBITDA, NewCo will be the second largest contract logistics company in the world, with approximately 200 million square feet of warehouse space.
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XPO’s stock has been weighed down by a conglomerate discount, as the company continues to trade at well below the sum of the parts and at a significant discount to its pure-play peers. The company believes that a spinoff is an optimal way to unlock significant equity value not currently reflected in the existing conglomerate as the transaction simplifies the business model and strengthens the focus of each resulting company. The company believes that the potential impact of the spin-off of its logistics segment, on aggregate equity value is based on a study of the valuation multiples assigned to its publicly traded peers that have more specialized business models. Both the XPORemainCo and NewCo are expected to have a lower debt profile, which would make it easier to achieve each company’s target of an investment grade credit rating.
Post-separation, 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 EBITDA. The business will comprise: The third largest provider of 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. 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 of 8% revenue CAGR.
Post spin-off, XPORemainCo and NewCo would both benefit from an undiluted focus on their specific strategic priorities and customer requirements. Each company would be able to deepen its differentiation by enhancing the proprietary software developed specifically for its service offering. The separation will enable both companies to have an investor base aligned with a clear-cut value proposition and be valued separately by the investment community, potentially resulting in an increase in equity value that would assist the business in executing its strategy. The separation will also allow flexibility in decision-making, capital allocations and capital structure to its business for both companies. Separate public stock listings would enhance each company’s ability to pursue accretive M&A opportunities, with the benefit of an independent equity currency at a potentially higher value.
XPO Logistics, Inc. (Parent)
XPO Logistics, Inc. (NYSE: XPO) is a top ten global logistics provider of cutting-edge supply chain solutions. The Company operates in two segments: Transportation and Logistics. The Transportation segment provides freight brokerage, last mile, less-than truckload (LTL), full truckload, and global forwarding services. Its freight brokerage operations encompass truck brokerage globally, as well as intermodal, drayage and expedite services in North America. In North America, it is the largest provider of so-called last-mile logistics for heavy goods, which means it can get large shipments from a transportation hub to their final destination. The Company is also a top trucking company in Europe, where it also has a dominant position in the delivery of online orders. Customers include retailers, e-commerce sites and food & beverage companies. The Logistics segment provides a range of contract logistics services, including highly engineered and customized solutions, value-added warehousing and distribution, cold chain solutions, and other inventory solutions. The warehousing and distribution solutions include factory support, aftermarket support, integrated manufacturing, packaging, labeling, and transportation. The company also offers services of its platform called XPO Direct, a shared-space distribution network that capitalizes on the strengths of its Logistics and Transportation segments in combination. XPO’s corporate headquarters are in Greenwich, Conn., USA, and its European headquarters are in Lyon, France. The company operates as a highly integrated network of people, technology and physical assets in 30 countries, with 1,499 locations and approximately 970,000 employees. The company generated revenues of $16.6 billion in FY19.
Logistics Segment (NewCo/Spin-Off)
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 of 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. In FY19, the Logistics segment recorded revenues of $6.1 billion.