XPO Logistics set to make another major acquisition, announcing it plans to acquire Con-way

Editor’s note: This story has been updated with additional information.

There are big acquisitions these days in the transportation and logistics sectors, and then there are really big acquisitions. When it comes to non asset-based 3PL XPO Logistics, its acquisitions are typically are among the latter.

That was demonstrated once again, with the Greenwich, Conn.-based company announcing yesterday that it plans to acquire Con-way, an Ann Arbor, Mich.-based provider of transportation and logistics services, including its flagship less-than-truckload group Con-way Freight, Con-way Truckload, and its global 3PL unit Menlo Logistics. These groups will be rebranded as XPO Logistics, and Con-way President and CEO Doug Stotlar will serve in a limited role as an independent advisor through the first quarter of 2016.

Con-way has 582 locations, roughly 30,000 employees, and more than 36,000 customers. Its full-year consensus estimates for 2015 are $5.7 billion in revenue and $528 million in adjusted EBITDA.

The purchase price for the acquisition, which is expected to be completed in October, is $3.0 billion, is expected to increase XPO’s revenue to $15 billion and almost double EBITDA to $1.1 billion, according to XPO.

When the deal is made official, XPO will become the second-largest North American-based LTL provider, coupled with expanding its global contract logistics platform and capitalizing on synergies from the meshing of Con-way’s managed transportation, truckload, and freight brokerage businesses. 

“LTL is a $35 billion business, and we look at it as an attractive business,” XPO Chairman and CEO Brad Jacobs told LM. “E-commerce is growing super-fast, and that is pushing out inventories for customers. Scale and technology will separate the winners from the losers, and we at XPO have both size and IT. We believe that requires a pathological sophistication to get to a high level of profitability. And there are an increasing number of online orders that are too big for parcel carriers and don’t require the white glove treatment of last-mile, and this type of freight moves in LTL networks, with LTL also benefitting from continued nearshoring of manufacturing to the U.S. We view LTL as a high value-add business and is used by nearly all of our 16,000 truckload customers in North America, while filling a gap in our service offering.”

And for Con-way’s 36,000 customers, XPO provides them with immediate access to all of XPO’s other services, he said.

Aside from LTL, bringing Con-way’s non asset 3PL Menlo Logistics on board with its three main service offerings-global contract logistics, freight brokerage, and managed logistics-highly similar to the ones presently offered by XPO, with Menlo currently the 15th largest North American contract logistics provider, the seventh largest North American provider of managed transportation with $1.3 billion of freight under management, and $200 million in truck brokerage. 

XPO expects to be intermodal benefits from this deal, too, with Jacobs explaining there is a lot of synergy with its intermodal business and the linehaul portion of Con-way’s LTL business, because some of the LTL linehaul can be moved from over the road to intermodal and save shippers money.

This deal also provides benefits in advance of the pending truckload capacity shortage, which many industry stakeholders contend is coming sooner rather than later.

“We agree with the vast industry consensus that the ongoing driver shortage and increasing regulations are contributing to a long-term shortfall in capacity that is unlikely to go away soon,” said Jacobs. “Gaining ownership of capacity is a strategic move by XPO in buying Con-way. We are seizing an opportunity to accelerate that growth in a very big way by buying the second-largest LTL in North America, which will give us a bigger seat at the table. Shippers give the vast majority of their ground freight to companies with assets, and our customers and employees are excited that we are now controlling assets through LTL capacity.”

XPO said it intends to increase Con-way’s annual operating profit by $170 million to $210 million over the next two years through synergies and operational improvements, as well as remaining asset-light with a net capex of 3.3 percent of revenue while increasing ground transportation capacity.

Jacobs said XPO had “serious discussions” with Con-way in the past about buying Menlo, driven by the similarities between the companies, but the companies could not agree on a price, despite a strong strategic rationale.

But after buying France-based global 3PL Norbert Denrtressangle earlier this year and meeting with customers there and hundreds of employees, Jacobs said he realized how important it is to many large shippers to have some measure of assets in your business mix, as it provides a greater level of credibility with many large shippers.

“After we had success with integrating Norbert, we saw the benefits that having assets offers and we went back and revisited it with not just Menlo, but all of Con-way,” he said. “When we studied Con-way, what we saw was a very concrete opportunity to improve annual operating profit by at least a couple hundred million dollars over the next couple years by cost savings, operational improvements, revenue synergies, and cross-selling.”

XPO said it intends to increase Con-way’s annual operating profit by $170 million to $210 million over the next two years through synergies and operational improvements, as well as remaining asset-light with a net capex of 3.3 percent of revenue while increasing ground transportation capacity.

Other notable benefits of this acquisition cited by XPO include:

• expanding XPO’s global contract logistics platform by 22 million square feet to 151 million square feet, with 160 more facilities to its footprint and the acquired operations serving blue chip customers in various verticals such as high-tech, healthcare and retail along with XPO’s expertise in aerospace, retail, telecom, agriculture, chemicals, and food and beverage;

• boost XPO’s position in the e-commerce sector that is expected to grow at an annual pace of 18-21 percent, with XPO and Con-way both having e-fulfillment contract logistics programs in North America and Europe;

• between the recent acquisition of Norbert Dentressangle, and the planned acquisition of Con-way, XPO will have significantly more ground transportation capacity to serve customers in Europe and North America. XPO’s network of brokered, owned and contracted capacity will have lane density covering approximately 99% of all postal codes in the United States, as well as the regions that produce 90% of the eurozone’s GDP;

• the addition of Con-way’s truckload fleet, including dedicated carriage, will increase cross-border Mexico services, which include intermodal, truck brokerage and expedite. Cross-border growth is projected to outperform industry growth, due to the near-shoring of manufacturing;

• the combination will grow XPO’s global ground transportation network to 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. In North America, XPO will have approximately 11,000 owned tractors and 33,000 owned trailers, 6,000 trucks contracted through independent owner operators, and access to more than 38,000 independent carriers; and

• the company will have combined scale of approximately 84,000 employees at 1,469 locations in 32 countries. XPO will fully integrate all Con-way’s operations under the single global brand of XPO Logistics and will expand the sharing of best practices throughout its organization

On an investor call today, XPO’s Jacobs said XPO and Con-way will leverage their combined technology infrastructure to reduce Con-way’s $227 million IT budget, adding that XPO has identified significant opportunities to improve purchasing and vendor management, adding that with greater purchasing power and best practices it will lower external spend for not just technology but also facility operations, equipment purchases, fuel, professional services, maintenance, and supplies, among others.

Another significant opportunity identified by Jacobs is integrating Con-ways freight brokerage business into XPO’s and move it onto XPO’s Freight Optimizer technology, which he said will allow XPO to share capacity and data, while seeing major savings by reducing the $3.6 billion in combined spend in purchased transportation.

“We will use the larger flow of data from our combined $2.7 billion of freight under management to identify carriers, assign loads and…build backhaul more efficiently,” said Jacobs. “In addition, we will tap our extensive intermodal network to improve LTL linehaul efficiency, shifting a portion of the freight to rail.”