A couple of years ago, XPO Logistics Inc. pursued a buy-out of Menlo Worldwide Logistics, the global contract logistics arm of Con-way Inc., but it couldn't make a deal work. In the months to follow, Bradley S. Jacobs, XPO's founder, chairman, and CEO, spoke to hundreds of customers who told him that if XPO wanted a "seat at the adult table" it would, to a large degree, need to control its assets.
Yesterday, Jacobs took his seat, agreeing to spend $3 billion in cash and assumption of debt to buy Ann Arbor, Mich.-based Con-way Inc. Con-way is the parent of one of the nation's largest less-than-truckload (LTL) carriers, a moderately-sized truckload unit with operations in the U.S.-Mexico trade lane, the Menlo contract logistics arm, and its Con-way Multimodal managed transportation division. Combined the company generates about $5.5 billion in annual revenue. The deal, announced after the markets closed yesterday, works out to a price of $47.60 a share, a sizable premium over Con-way's closing price yesterday of $35.53 a share. No counteroffers from other bidders are expected.
Jacobs said the acquisition makes Greenwich, Conn.-based XPO the second-largest LTL operator in the U.S., behind only FedEx Freight, the LTL unit of Memphis-based FedEx Corp. The deal puts XPO squarely in the asset-based arena and represents a dramatic pivot from the company's strategy of building a multibillion-dollar enterprise from the acquisition and integration of nonasset-based providers as well as launching nonasset-based operations. In North America, XPO said, it will own approximately 11,000 tractors and 33,000 trailers, will have 6,000 trucks contracted through independent owner-operators, and will have access to more than 38,000 independent carriers. Globally, XPO will own approximately 19,000 tractors and 46,000 trailers, have 10,000 trucks contracted through independent owner-operators, and gain access to more than 50,000 independent carriers.
In a conference call with analysts and the trade press this morning, Jacobs responded to questions about his apparent shift from a largely nonasset-based strategy to one that incorporates a significant amount of assets, saying that XPO is seeking a "more blended model of brokered, owned, and contracted capacity." One major reason for that change—which he termed an "evolution"—is that by controlling assets, XPO will be able to reliably serve customers during periods of tight capacity. Jacobs also said that his experience with Norbert Dentressangle, the French 3PL bought in April for US $3.5 billion, had led him to take a fresh look at XPO's long-term strategy. After speaking with many of Dentressangle's customers, he said, he gained a greater appreciation of the benefits of being able to offer a broader array of services to existing customers.
"If you have assets, you can do more business with those customers," he said. Otherwise, "you're only going to get 2, 3, or 4 percent of those customers' transportation spend." By adding Con-way and Menlo, XPO can sell its existing services to their customers, and vice-versa, he said.
END OF ONE ERA, START OF ANOTHER
The deal marks the end of Con-way's 86-year life as an independent entity; during most of that time, the company was known as
Consolidated Freightways (CF). In the mid-1980s, CF was split into various nonunion regional trucking firms that later assumed
the Con-way Freight name, while the old company remained in long-haul trucking. That would prove to be the beginning of CF's end,
as strategic mishaps, reduced demand for long-haul services, and noncompetitive labor costs forced it out of business in 2002.
The XPO-Con-way deal isn't expected to close until the end of October, and Jacobs, in a phone interview today, declined to comment on how he expects Con-way's operations to fully evolve. For now, the LTL unit will operate on the roads as it currently does, with XPO's truckload system cross-selling its products and services, Jacobs said. Con-way's contract logistics business and small $200 million truck-brokerage operation will be folded into XPO's existing service lines, he added. Jacobs said he has not yet met with the executives running Con-way Multimodal, a $1.3 billion-a-year managed transportation operation. When the deal closes, the combination of XPO's existing managed transportation business and Con-Way Multimodal will have about $2.7 billion in freight under management, Jacobs said. All of Con-way's units will be rebranded as XPO Logistics.
XPO said in a statement yesterday that it expects to boost Con-way's annual operating profits by $170 million to $210 million over the next two years through what it calls "synergies and operational improvements." Con-way President and CEO Douglas W. Stotlar, who in recent years has been criticized by analysts for failing to maximize the value of the company's assets, will serve in a limited role as an independent advisor through the first quarter of next year. Because there are few trucking executives available to step in and run an LTL operation the size of Con-way Freight, it is expected that most of the projected profit increases will come from enhanced operational and information technology efficiencies, rather than through significant growth sparked by the cachet of a powerhouse trucking executive at the helm.
Jacobs said in the conference call, however, that he would run Con-way's LTL business himself for the time being, and that XPO would seek a new leader soon. The eventual choice would not necessarily come from within the trucking industry, although that would be preferable, he added.
One theory making the rounds is that Jacobs will eventually sell off the trucking operations because only Menlo and Con-way Multimodal blend well with XPO's existing businesses. Con-way's asset-based units have been considered underperformers for years. The LTL business, while stable, has not been able to return to the stellar operating ratios—the ratio of revenues to expenses that is a benchmark of efficiency and profitability—that some of its better-run peers have achieved in recent years. Con-Way Truckload, which operated as Contract Freighters Inc. (CFI) before it was acquired by Con-way in 2007 for $750 million, has generally been viewed as a disastrous acquisition. In a note this morning, Kevin Sterling, transport analyst for BB&T Capital Markets, an investment firm, pegged Con-way Truckload's 2015 market value at $540 million, which includes $108 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) and $425 million in debt, roughly the same amount of debt Con-way assumed when it bought the old CFI.
Although Con-way Truckload is smaller and considered less of a core business than Con-way Freight, its strong U.S.-Mexico presence would appear to mesh somewhat effectively with the former Pacer International, an intermodal marketing company bought by XPO in January 2014 that at the time generated about 40 percent of its revenue in the U.S.-Mexico intermodal corridor.
Once it closes, the Con-way deal will increase XPO's third-party logistics (3PL) revenues (not including the Con-way trucking operations) to approximately $10 billion, making it the sixth-largest global 3PL, according to data from Armstrong & Associates, a consultancy. The deal would make 2015 the largest year for 3PL deals of more than $100 million in value since Armstrong began tracking activity in 1999, it said.
Menlo may end up being the jewel in the crown—a term Jacobs himself used in today's conference call. It had 2014 gross revenues of $1.7 billion and net revenue (revenue minus costs) of $748 million and manages 138 warehouses totaling 21 million square feet, Armstrong said. The combination will expand XPO's global contract logistics platform by 22 million square feet to 151 million square feet, XPO said.
In a note yesterday, Armstrong said Menlo has significantly grown its China and Southeast Asia networks, which will be a strong addition for XPO. Menlo has also expanded in Europe, which will serve XPO well as it continues to integrate the newly acquired Norbert Dentressangle into its global network, Armstrong said.
Senior editor Toby Gooley contributed to this article.
Gartner, Inc.
