XPO Logistics Inc. announced late Tuesday that it will divest its North American truck brokerage and related business and divest its European operations, moves that will transform the company into a pure LTL provider on the continent.
XPO (NYSE:XPO) also disclosed that it was in advanced talks with an unidentified suitor to sell its North American intermodal and drayage business, which generated approximately $1.2 billion in revenue last year and operates 44 locations in North America. A sale of the intermodal business, should it occur, should be completed within the next three to four weeks, according to people familiar with the situation. If the deal fails, the company will be included in the spin-off, which is expected to take place in the fourth quarter of 2022.
XPO said its managed transportation and last-mile freight forwarding businesses will be included in the spin-off. The combined segments generated $4.8 billion in revenue in 2021.
The company is considering selling or listing its European business, which generated approximately $3.1 billion in revenue in 2021. Most of XPO’s European business came from the transportation arm of the former Norbert Dentressangle SA, the French transport and logistics company that XPO acquired. in 2021 for $3.5 billion. Dentressangle’s European logistics business eventually became GXO Logistics Inc. (NYSE: GXO), which XPO created last August.
If the multiple transactions go as planned, XPO will have streamlined its business to the point of becoming a standalone LTL carrier. Brad Jacobs, President and CEO of XPO, has sought for years to elevate XPO’s rating status to the levels enjoyed by Old Dominion Freight Line Inc. (NASDAQ: ODFL) and Saia Inc. (NASDAQ: SAIA), both of which are essentially pure-play providers and have performed better than XPO. For example, XPO’s LTL operating ratio, the expense-to-revenue ratio, was expected to reach 86.3% in the first quarter, an improvement from the prior quarter. Old Dominion, on the other hand, posted an operating ratio of 73.4% in the fourth quarter, all-time highs for an LTL carrier.
Prior to the GXO spin-off, Jacobs argued that XPO had long been penalized by a “conglomerate discount” because analysts and investors struggled to value its many moving parts. After the GXO split, attention turned to whether XPO could sell or divest its non-LTL assets to further simplify its value proposition on Wall Street.
The aggregate trading price of the two companies is expected to exceed the price at which XPO shares would trade if the trades remained combined, the company said. XPO shares jumped nearly 9% in after-hours trading after rising 2.7% in the regular trading session. Shares that were trading at around $90 at the time of the GXO spinoff have fallen to around $60 per share in recent weeks.
The brokerage business has delivered strong performance in recent quarters, leveraging favorable macroeconomic conditions and robust technology to achieve high levels of profitability. The segment saw a 36% gain in fourth-quarter gross revenue year-over-year to $846 million. Net income, defined as gross income minus the cost of transportation and services, increased 10% to $128 million. Brokerage generated $4.8 billion in revenue in 2021, $700 million more than the LTL segment.
The LTL business generated operating profit of $618 million and adjusted profit before interest, taxes, depreciation and amortization of $904 million. XPO expects the LTL operation to reach $1 billion in adjusted EBITDA this year. In Tuesday’s announcement, XPO confirmed its first-quarter and full-year guidance released a month ago.
The spin-off company will be based in Charlotte, North Carolina, where XPO already has a large footprint.
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