XPO Logistics signals intent to spin its Logistics group into two separate companies

Significant changes may be coming for Greenwich, Conn.-based global freight transportation and logistics services provider XPO Logistics, with the company announcing today that its board of directors signed off on the approval of a plan to seek a spin-off of its logistics group as a standalone publicly traded company.

Should this spin-off come to fruition, the logistics group would be split into two separate publicly-traded companies on the New York Stock Exchange: XPORemainCo, a global provider of less-than-truckload (LTL) and truck brokerage transportation services; and NewCo, which would become the second-largest global contract logistics provider, with around 200 million square feet of warehouse space.

XPO said it expects this transaction to be completed in the second half of 2021, with the deal subject to various conditions, with the caveat that there can be no assurance that a separation transaction will occur or, if one does occur, of its terms or timing.

“By uncoupling our transportation and logistics segments, we intend to create two high-performing, pure-play companies to serve the best interests of all our stakeholders,” said Brad Jacobs, chairman and chief executive officer of XPO Logistics, in a statement. “Both businesses will have greater flexibility to tailor strategic decision-making and capital allocations to their end-markets, with the benefit of strong positioning as customer-focused innovators. We currently believe that this spin-off is the most effective way to unlock significant value for our customers, employees and shareholders.”

XPO officials said that upon the expected completion of the spin-off, Jacobs would continue to serve as chairman and CEO of XPORemainCo and also become chairman of the NewCo board, and Troy Cooper will stay as president of XPORemainCo, with the current executive team for the XPO global logistics segment staying in senior NewCo positions.  

An XPO spokesman told LM that there are various shipper benefits related to the proposed spin-off, with the management teams of XPORemainCo and NewCo being solely focused on their respective companies’ strategic priorities and busines opportunities, making for what he called a much more targeted approach.

And related to that, he said that each company will have strong technology teams that will be focused on continuing to enhance their respective innovative services, which has been a longstanding focus for XPO Logistics since its inception in 2011.

In terms of service offerings for the respective companies, one of the main things that will be different will be the split out of XPO’s transportation and contract logistics groups into two separate pure play publicly-traded companies.

“From a customer standpoint, they will continue to come to us for LTL and truck brokerage, which are the two main pieces of our transportation business, and represent about 90% EBITDA for XPORemainCo,” he said. “And on the contract logistics side at NewCo, we will still have our global operations in North America and Europe.”

When asked about staffing levels for the new companies, with XPORemainCo at around 38,000 employees and 724 locations, and NewCo at around 58,000 employees and 766 locations in 27 countries, the spokesman said staffing levels come down to how demand plays out.

“The reason for that—at NewCo—is that we have a ton of e-commerce exposure, and that is really what we do from a financial perspective,” he said. “One of the trends that we are noticing, in terms of secular tailwinds, is that large customers are coming to us more and more for our expertise in contract logistics, and the pandemic really brought that to their attention, because they are seeing how crazy things can get and they really need more visibility into their supply chains. And they are coming to us because they know we have leading positions and critical expertise. The other secular tailwind is that we are seeing increased demand for supply chain automation, and with so much macro uncertainty, our customers are looking to do more with less and as they optimize their costs structure, they are also seeing the additional benefits within our warehouses, with our staff being practicing social distancing on both the forward and reverse logistics sides.”

What’s more, on the technology side, XPO said its plan is for NewCo to have what it called a “perpetual license” for all of XPO’s software and technology that is has been building over the years, which would be purpose-built for its logistics business.

With the spin-off not expected to take place until the second half of 2021, the XPO spokesman said that things will remain business as usual, with these types of initiatives typically taking anywhere from six-to-nine months. The more time-consuming part of this comes from a regulatory standpoint, as the company goes through the paces, he added.

Ben Gordon, Managing Partner of Cambridge Capital, an investor in niche supply chain leaders and also Managing Partner of BGSA Holdings, a leading mergers and acquisitions advisory firm focused on the transportation, logistics, and supply chain technology sectors, said that for nearly a decade Brad Jacobs has focused on maximizing shareholder value at XPO.

“He believes the business is undervalued today, and he has a point,” noted Gordon. “LTL carriers like Old Dominion trade at 17x EBITDA. At the same time, logistics companies like CH Robinson trade at 18x EBITDA. Meanwhile, XPO is trading at 8x EBITDA. Brad’s thesis is that if he separates the businesses into a NewCo (focused on contract logistics) and a RemainCo (focused on LTL, brokerage, and last-mile), he will get credit from the markets as a pure play. The fact that Brad intends to be Chairman of both companies will be reassuring for investors. And the fact that Brad will remain CEO of RemainCo reflects his enthusiasm for that business. It will be interesting to see who becomes CEO of the contract logistics business.”

And Evan Armstrong, president of Milwaukee-based supply chain consultancy Armstrong & Associates, said that XPO's move makes strategic sense, it comes with a significant caveat.

"It would probably would’ve made more sense just to spin off the LTL portion, since there are synergies between freight brokerage and the other third-party logistics offerings," he said. "But it’s a nice step in the right direction. There is little synergy between LTL and third-party logistics in the U.S."