Combine a successful entrepreneur and businessman, an industry ripe for consolidation, and a cluster of small businesses that may be ready to sell out at the right price, and, if nothing else, it could create the most compelling stew of activity the U.S. transportation industry has seen in some time.
Stirring the pot will be 55-year-old Bradley S. Jacobs, a balding, bespectacled Providence, R.I., native. Jacobs may lack the visibility of such buy-out artists as Carl C. Icahn and William A. Ackman, but he has prospered greatly in his own right by starting and running businesses in three other industries: energy, equipment rental, and solid waste.
Now, Jacobs has set his sights on transportation, specifically the $50 billion-a-year truck brokerage sector, where third parties help shippers locate available truck capacity, among other services.
Last year, Jacobs led a team that invested $150 million in cash in a non-asset-based expedited transportation company called Express-1 Expedited Solutions Inc. He renamed the company XPO Logistics and installed himself as CEO. From this platform, Jacobs aims to construct a $5 billion to $6 billion-a-year powerhouse mostly by unifying a scattered truck brokerage segment through a combination of acquisitions and organic expansion XPO refers to as "cold starts."
Jacobs, who opened an office late last year in Phoenix, envisions launching about 20 cold-start offices over the next 18 months to three years. He said he expects each location to generate between $25 million and $200 million in revenue a year.
In addition, Jacobs projected that XPO would make five to seven brokerage acquisitions a year. XPO had not made any acquisitions as of this writing, though Jacobs said in other interviews that he has talked to about 100 potential acquirees.
Jacobs said XPO has about $70 million in cash and a $10 million line of credit that could be expanded if necessary. The combination of cash and credit availability should get XPO through the first phase of acquisitions and cold starts, which, if business grows as Jacobs hopes, will result in a near-doubling of XPO's current annual revenue to about $400 million.
XPO will also look to build a presence in other non-asset-based operations, like freight forwarding and time-critical transportation, Jacobs said. However, the bulk of his efforts will be focused on truck brokerage.
A major wager
Jacobs' bet is big and, in the eyes of many, unprecedented. No one recalls a transportation logistics company of this size (XPO is expected to report about $225 million in annual revenue in 2011) achieving a 20- to 30-fold increase in its top line in five years.
"It's quite a challenge, and it will take a lot of acquisitions to build out the [revenue] model and hit those goals," said Evan Armstrong, president of Armstrong & Associates, a Stoughton, Wis.-based consultancy that follows the third-party logistics and truck brokerage sectors and has done consulting and advisory work for XPO.
Charles W. Clowdis Jr., managing director, transportation advisory services for consultancy IHS Global Insight, said there aren't many truck brokers with net revenues—gross revenues minus purchased transportation costs—in the millions of dollars for XPO to roll up into a multi-billion enterprise. Clowdis said there might be a large block of owners willing to sell to XPO, but only at an appropriate multiple of earnings that meets their exit requirements.
Then there's the competition. Besides the established companies like C.H. Robinson Worldwide Inc.—with the industry's largest brokerage operation—and Echo Global Logistics, truckload carriers are muscling into the brokerage segment as a way to round out their product offerings. XPO could also face competition from the executives of the companies it buys out unless the sellers sign ironclad non-compete contracts, Clowdis said.
Beyond the buyouts and the cold starts, XPO's success will hinge on everyday execution, namely the ability to maintain and strengthen relationships with shippers and carriers, and to develop a solid IT network that extends real-time visibility to all of its customers and service providers. XPO plans to have one IT platform extending across its brokerage, freight forwarding, and expedited transport businesses.
Jacobs recognizes that potholes lie ahead. For example, the marketplace may not welcome a potentially disruptive player to the game, and the capital markets may not be healthy enough to support XPO's funding needs. "The risks are there, and they are not trivial," he said in a recent interview with DC Velocity.
XPO's publicly traded shares took a hit in the fall after the company reported a $5.38 per-share third-quarter loss. The stock price fell steadily through November, though it had recovered some of its losses by the middle of December.
The company said the third-quarter loss was due to accounting charges relating to Jacobs' initial $150 million investment, the expense of building out the IT network and physical infrastructure, and the cost of recruiting high-end personnel.
XPO's executive team includes Greg Ritter, who built the brokerage business of truckload giant Knight Transportation after spending 22 years at C.H. Robinson; Scott Malat, who was Goldman, Sachs & Co.'s senior equity transportation analyst; and Richard M. Metzler and Thomas Connolly, who combined have decades of mergers and acquisitions experience in the transportation and finance fields, respectively.
"Begging to be consolidated"
Despite the risks, Jacobs believes the characteristics of the truck brokerage business are so favorable as to make the potential negatives seem minor. Perhaps the sector's strongest lure to an entrepreneur like Jacobs is its extreme fragmentation. There are approximately 10,000 licensed truck brokers in the United States, but only about 25 have annual gross revenues—revenues before the cost of purchased transportation—of more than $200 million.
C.H. Robinson is on track to generate more than $10 billion in gross revenues in 2011. Robinson's 2011 net revenue, which includes the cost of transportation, will be about $1.5 billion if current patterns hold. The next 29 biggest brokers have combined net revenues of about $1.9 billion, according to Armstrong & Associates.
Many truck brokers, though successful, remain small because they lack the working capital to fund a meaningful expansion. It is this wide net of modestly sized brokers—those with $30 million to $200 million in annual gross revenue—that Jacobs has targeted.
Jacobs said the number of small brokers fighting for market share means the brokerage business is "just begging to be consolidated." He added, "Small companies are more valuable to me as part of a larger company than they are to the actual owners who control them."
The sector has also shown a long-running pattern of above-trend growth, regardless of macroeconomic conditions. For years, it has grown two to three times faster than annualized gross domestic product, and it continues to do so.
Jacobs figures broker services will remain in demand as many small to mid-sized shippers that lack dedicated shipping departments increasingly turn to third parties to help them find the best deals from the approximately 250,000 trucking companies that ply the nation's roads. He contends that, over time, XPO and others will find themselves competing for a larger pie than what exists today.
"I am making a bet that the way transportation is purchased today by smaller shippers is inefficient," he said. "And I am making a bet that a growing percentage of shippers will use brokers because it is more efficient."
In addition, the brokerage model is easily scalable because it is so sales driven, and it operates with significant variable costs, meaning a manager can get to critical mass of network capacity without a massive fixed investment. Jacobs followed this approach in growing his four prior companies, and he is not about to stop with XPO.
"Brad realizes you need to have scale to build capacity, and this is something he is very good at," said Armstrong.
A long entrepreneurial history
At mid-life, Jacobs is poised for what could end up being the biggest of his many paydays. At 23, Jacobs co-founded Amerex Oil Associates Inc., a New Jersey-based oil brokerage firm, and served as its CEO until the firm was sold in 1983. The next year, he moved to England and founded Hamilton Resources (UK) Ltd., an oil trading company. Using most of his savings and a $1 billion line of credit, he built the company into a $1 billion-a-year enterprise.
In 1989, he founded United Waste Systems, Inc., which became the United States' fifth largest solid waste company before it was acquired by United Waste Services in 1997 for $2.5 billion, including debt. In 1997, he founded United Rentals Inc., which had become the world's largest equipment rental company by the time Jacobs stepped down from day-to-day management a decade later.
Jacobs said his prior endeavors required significant transportation and supply chain experience, the ability to meld acquisitions and organic expansion, and a mastery of information technology to connect multiple offices in disparate locations across a single network. Those skills will be heavily utilized as he goes where few in the transportation field have gone before.
Ben Gordon, managing director of BG Strategic Advisors, a Palm Beach, Fla.-based logistics mergers and acquisitions advisory firm, thinks it would be foolish to sell Jacobs short. "We think Brad is likely to be very successful," Gordon said. "We believe in his strategy."
Wreaths Across America
