Wednesday, September 9, 2015


 Can they manage and integrate two major acquisitions at the same time?

XPO Logistics to acquire Con-way for $3b

With the latest in a series of blockbuster M&A deals in the logistics industry this year, XPO would become the second largest less-than-truckload provider in North America.

   In a year that has already seen several blockbuster mergers and acquisitions in the transportation and logistics industry, third-party logistics roll-up XPO Logistics, Inc. is at it again.
   Greenwich, Conn.-based XPO has entered into a definitive agreement to acquire all outstanding shares of Con-way Inc. for $3 billion, including $290 million in net debt, according to a joint statement from the companies. The valuation is approximately 5.7 times the company’s consensus 2015 earnings before interest, taxes, debt and amortization (EBITA) projection of $528 million.
   The announcement came shortly after Hervé Montjotin resigned as CEO and chairman of XPO Logistics Europe. XPO acquired the iconic iconic French logistics and trucking company Norbert Dentressangle SA, then headed by Montjotin, in June. 
   The purchase price for Con-way, a transportation, logistics and supply-chain management services provider and the second largest less-than-truckload (LTL) provider in North America, is based on a cash price of $47.60 per share. The per-share cash price represents a premium of approximately 31.6 percent to the closing price of the company’s common stock on Sept. 8, and 22.9 percent compared to the average closing price over the past 90 trading days.
   Headquartered in Ann Arbor, Mich., Con-way sports a transportation and logistics network of 582 locations and approximately 30,000 employees serving over 36,000 customers. Analysts estimate the company will pull in $5.7 billion in revenues for the full year in 2015 and expect the transaction to be substantially accretive to XPO's earnings in the first 12 months.
   Acquiring Con-way will enhance XPO's range of supply chain solutions by making it the second largest LTL provider in North America, but it will also expand the company's global contract logistics platform with the addition of Con-way's managed transportation, truckload and freight brokerage businesses.  Under the terms of the deal, Con-way will merge with a subsidiary of XPO, becoming a wholly owned subsidiary of XPO, and all of its business units, including Con-way Freight, Menlo Logistics, Con-way Truckload and Con-way Multimodal, will be rebranded as XPO Logistics.
   The companies said the transaction, expected to close in October, is not conditioned on financing, as investment firm Morgan Stanley has agreed to provide XPO $2 billion to go with approximately $1.2 billion in cash and an undrawn $415 million revolving line of credit. Although the boards of directors of both companies have unanimously approved the acquisition, the deal is still subject to approval from relevant regulatory authorities.
    XPO chairman and CEO Bradley Jacobs will continue to lead the combined company, while Douglas Stotlar, Con-way's president and chief executive officer, will serve in a limited role as an independent advisor to the combined company through the first quarter of 2016. The company will have a combined workforce of approximately 84,000 employees at 1,469 locations in 32 countries.
   The companies listed several positive outcomes of a potential tie-up.   Con-way’s various operations serve “blue chip” customers in the high tech, healthcare and retail sectors, complementing XPO's expertise in aerospace, retail, telecom, agriculture, chemicals and food and beverage.
   With the addition of Con-way and its subsidiaries, XPO expects to increase its annual operating profits by $170 million to $210 million through cost savings and operational improvements executed over the next two years. The combination will add 160 facilities and 22 million square feet to XPO's global contract logistics platform, bringing it to a total of 151 million square feet.
   XPO said the merger will also strengthen its position in the e-commerce sector, which the company expects to grow at an annual rate of 18 to 21 percent.
   The addition of Con-way's truckload fleet, including dedicated carriage, will increase cross-border services to and from Mexico, projected to outperform industry growth due to the near-shoring of manufacturing.
   The combined company will boast a global ground transportation fleet of approximately 19,000 owned tractors and 46,000 owned trailers, 10,000 trucks contracted through independent owner operators, and access to more than 50,000 independent carriers. XPO said it will remain asset-light after the merger, however, with net capital expenditure of 3.3 percent of revenue and asset-based operations accounting for about a third of its overall sales.
   Within 12 months of closing the deal, XPO expects to realize cost synergies by improving purchasing and supplier management, reducing Con-way’s primarily outsourced $227 million annual technology spend, eliminating duplicative functions, and integrating Con-way's $200 million brokerage business through XPO's proprietary Freight Optimizer technology.
   In the second year of operation, the company said it will continue to improve profits by reducing its $3.6 billion combined spend on purchased transportation, using data from its combined operations to identify carriers, assign loads and fill backhauls more efficiently, and utilizing its extensive intermodal network to improve LTL line-haul efficiency.
    “Our opportunistic acquisition of Con-way will make XPO the second largest provider of less-than-truckload transportation in North America, a $35 billion market,” Jacobs said of the purchase. “LTL is a non-commoditized, high-value-add business that's used by nearly all of our customers. Con-way is a premier platform that we will run with a fresh set of eyes as part of our broader offering. Importantly, we'll gain strategic ownership of assets that will benefit our company and our customers during periods of tight capacity.
   “Another crown jewel in this transaction is Con-way's subsidiary, Menlo Logistics, an asset-light top 30 global contract logistics provider with additional lines of business in freight brokerage and managed transportation. Menlo serves blue chip contract logistics customers in verticals such as high tech, healthcare and retail, which complement the verticals we serve at XPO,” he added.
   “The Con-way transaction will nearly double our pro-forma full year EBITDA to approximately $1.1 billion and increase our revenue to $15 billion upon closing. We'll immediately begin executing our plan to improve the operating profit of the acquired operations by $170 million to $210 million over the next two years. We'll raise our year-end 2015 target run rates for revenue and EBITDA, and issue new long-term targets, when we close."
   “This landmark transaction provides immediate cash value for our shareholders and reflects the outstanding contributions of our employees over our 86-year history,” said Stotlar. “The combination will mean more services for our customers, more miles for our drivers, and more career opportunities for our employees as part of XPO's global organization. We look forward to working with the XPO team to complete the transaction and ensure a smooth transition.”