XPO Logistics confirmed plans to explore strategic alternatives, including a sale of the company
Shares of XPO Logistics (XPO) jumped on Thursday after the company confirmed plans to explore strategic alternatives, including a sale of the company or spinoff of one or more business units.
XPO EXPLORING SALE, SPINOFF: XPO Logistics is exploring strategic alternatives, including the potential sale or spinoff of one or more of its business units, the company confirmed on Wednesday afternoon. The company said its board of directors has authorized a review to examine alternatives for its business divisions, which would not involve the company's North American less-than-truckload unit. It has hired Goldman Sachs (GS) and J.P. Morgan Securities (JPM) as its financial advisors and Wachtell, Lipton, Rosen & Katz as its legal advisor to assist with the review process, it added.
In a statement, Chairman and Chief Executive Officer Bradley Jacobs said that XPO is the seventh best-performing stock of the last decade on the Fortune 500, based on Bloomberg market data and that the share price has increased more than ten-fold since 2011. Still, Jacobs said XPO continues to trade at "well below the sum of our parts and at a significant discount to our pure-play peers. That's why we believe the best way to continue to maximize shareholder value is to explore our options, while remaining intensely committed to the satisfaction of our customers and employees." In an interview with The Wall Street Journal, Jacobs said Goldman and JPMorgan have been "mandated to run four simultaneous auction processes" for XPO’s European transportation and supply chain units, its supply chain business in the Americas and the Asia-Pacific regions and the company’s North American transportation unit, excluding the less-than-truckload business. "We may not sell all four, we may sell none," Jacobs added.
The company has not set a timetable for completion of the review process, nor has it determined which, if any, business units would be sold or spun off.
WHAT'S NOTABLE: XPO's decision to seek strategic alternatives is a sharp reversal from its comments more than two years ago that it was ready to spend up to $8B on new acquisitions. XPO closed more than $8B in deals between 2011-2015, according to the Journal, including the $3B purchase of Con-Way, whose truckload division was sold in 2016.
In late 2018, XPO's plans to buy were hampered by a report from noted short-seller Spruce Point Capital Management that accused the company of hiding losses through aggressive accounting. In May 2019, Spruce Point tweeted "business grinding to a halt for them across the country #miami #texas #california #connecticut. Teamsters standing up against a company that has not listened to them while its CEO enriches himself for losing big customers #amzon #cummins."
POTENTIAL BREAKUP 'HAS VALUE': Citi analyst Christian Wetherbee sees value in the potential breakup of XPO Logistics, but he noted the process announced last night in a press release has just started. There is "sizeable" potential value from divestitures, particularly assuming control premiums, but the announcement coming before any discussions with potential buyers have been had is surprising, Wetherbee told investors. Jefferies analyst David Kerstens told investors in a research note of his own that he thinks the businesses under review represent greater than 40% of revenue, including European transport and North American freight brokerage. The strategic review could unlock additional value in the range of $30-$60 per share, according to Kerstens.
However, Morgan Stanley analyst Ravi Shanker said the mathematical logic for XPO Logistics exploring strategic alternatives "seems clear," but he believes the "strategic logic is a bit harder to understand" given the wide range of outcomes, potential that XPO could be stuck with businesses that the market may view to be "damaged" or unsellable, and a lack of clarity on the dis-synergies of scale that might exist. If XPO manages to divest all its non-core businesses, it could end up being the industry's second-best less-than-truckload shipper with an excellent balance sheet, said Shanker, but also asked, "is a +30% base case upside enough for a potential outcome that breaks up the company and ends XPO as we know it?" Loop Capital analyst Jeffrey Kauffman noted that investors are considering the stock trading at higher multiples as the company considers selling or spinning off divisions, but he "struggles" to see upside from current levels without the "meaningful change" in XPO Logistics' EBITDA and given its higher debt levels.
PRICE ACTION: In morning trading, shares of XPO Logistics climbed 13.3% to $93.94.
Keywords: strategic alternatives, sale, spinoff, advisers, analyst commentary