XPO’s Dive into Trucking Raises Concerns, Prompts Ratings Review
Moody’s says ‘sheer pace and magnitude’ of acquisitions raises risks at growing logistics business
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(From L) Former Norbert Dentressangle, Chief Executive Herve Montjotin and XPO Logistics' CEO Bradley Jacobs. Photo: Agence France-Presse/Getty Images
XPO Logistics Inc. ’s $3 billion deal to acquire trucker Con-way Inc. just months after another multi-billion dollar deal is raising investor concerns and scrutiny over the company’s ability to combine two businesses.
Moody’s Investors Service Inc. on Thursday placed its ratings for XPO’s credit rating for a possible downgrade from a current rating that is already classified as high risk. “The sheer pace and magnitude of recent acquisitions elevates forward execution risk and balance sheet leverage relative to earlier expectations, and could be exacerbated further by increasing macroeconomic weakness,” Moody’s senior credit officer Chris Wimmer wrote in a report on the action.
The company did not immediately respond to requests for comment the Moody’s review, issued late Thursday.
Investors have hit the company’s shares since the acquisition of French trucking company Norbert Dentressangle SA closed in June. XPO shares are down about 40% since hitting their 2015 high in late May, including a 11% decline on Thursday to end at a more-than one-year low of $30.24.
The Con-way acquisition announced Wednesday deal will make XPO one of the largest freight transportation providers in the U.S., advancing a plan to become an all-in-one logistics and transportation firm. Unusually in the fragmented trucking market, XPO will offer a wide array of services, including short-haul trucking at ports and freight brokering. The company is betting that diverse mix will allow it to lower costs and win bigger clients.
But success will rest largely on the ability of XPO, which generates most of its revenue in the asset-light business of matching shippers with carriers, to operate Con-way’s trucking fleet. That could be a challenge as the company is still digesting its purchase of Norbert Dentressangle in June and numerous other acquisitions in the last five years, analysts say.
Concerns about the pace of integration were heightened last week, when Hervé Montjotin, Norbert’s former chief executive, who had headed XPO’s European arm since the acquisition, resigned.
Offering so many shipping services under one roof “is a very interesting capability [that] immediately catapults XPO into a different stratosphere”, said Mike Regan, chief of relationship development at TranzAct Technologies Inc., which helps shippers negotiate freight rates. “But to what extent am I willing to bet my supply chain on their being able to seamlessly integrate their capabilities? That’s a big question.”
XPO Chief Executive Bradley Jacobs said in an interview earlier Thursday that his company would win back investors who had lost faith in the company after the latest acquisitions.
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“We’re confident that long-term it’s going to create immense shareholder value,” he said.
The tie-up between XPO and Con-way is prompting speculation within the trucking world about whether other less-than-truckload carriers will need to merge with logistics companies to stay competitive. On Thursday, shares of YRC Worldwide Inc., one of Con-way’s largest competitors, jumped 7%.
The acquisition could give XPO more power over pricing, which could translate to higher prices for shippers, particularly if it sparks more consolidation in the transportation industry, said Jeremy Bodenhamer, CEO of ShipHawk Inc., which provides price comparison and other services to shippers.
“In certain markets where they have better coverage, and better control, and there’s capacity shortages, you’ll start seeing prices rise,” he said. “And where they need to compete, you may see prices drop to the point where it negatively affects [other] players that can’t afford to operate.”
Mr. Jacobs said in a conference call with analysts after the acquisition that holding assets will be important over the long term.
“There will be a capacity shortage in the next few years,’” he said. “And when it does, he who controls the assets will do very well.”
Bundling transportation services has been tried before by United Parcel Service Inc. and FedEx Corp., with limited success, said Matt Troy, an analyst at Nomura. The challenge lies in combining two businesses with little overlap in a way that saves XPO money and allows it to command better pricing from customers, analysts say.
“It’ll definitely help [XPO] in the marketplace,” said David Ross, transportation and logistics analyst at Stifel. “It’ll be able to win larger customers, new customers they hadn’t been able to get before. The key is just going to be execution and, if they can win their business, can they keep it and can they grow it?”
