XPO Logistics sells North American truckload business to TransForce

Third-party logistics and freight transportation services provider XPO Logistics said late yesterday it has sold its truckload business to TransForce Inc., a Montreal-based transportation and logistics services provider, for roughly $558 million in cash, subject to customary payments. XPO bought the truckload business, formerly Con-way Truckload, through its $3 billion acquisition of Con-way, which was completed in October 2015. 

XPO said that it will use the proceeds from the sale to pay down debt. XPO’s truckload asset count is comprised of approximately 3,000 tractors, 7,500 trailers, and 29 locations, which it acquired through Con-way. In the second quarter of this year, XPO’s truckload business had $133.4 million in operating revenue, and net revenue was $16.0 million. 

XPO Chairman and CEO Brad Jacobs told LM in an interview that the primary driver for this sale was for XPO to pay down debt.

“Even though it is a good business, it is only the 19th largest U.S. truckload carrier, and we are number one or close to number one in all of our other business lines,” he said. “We are going to concentrate on growing our value for customers where we are industry leaders. “It is a win-win deal. TransForce got this established organization with a significant presence in cross-border Mexico. But we wanted to strengthen our balance sheet, reduce our annual capex spend, and improve our long-term growth profile.”

While XPO has officially divested its truckload business operations and assets, Jacobs made it clear the company will continue to offer full truckload services to its North American customers through XPO’S freight brokerage network, which is the second largest in the world. And he said that Sunday, October 30, marks the one-year anniversary of the Con-way acquisition, noting that the integration of Con-way into XPO has gone “extremely well” and is reflected in the dramatic improvement in the company’s financial results, and an increase in already-high levels of customer satisfaction.

The sale of the truckload business, stressed Jacobs, was a standalone decision for one non-strategic operation, with XPO remaining fully committed to the other lines of business it bought from Con-way that remain important parts of XPO. As an example, he cited to commitment to XPO’s less-than-truckload (LTL) fleet and operations.

News of this deal did not entirely come as a surprise, considering that XPO has received offers for the truckload business since acquiring Con-way in October 2015. Jacobs told LM last year that XPO had received some unsolicited inbounds (offers) from interested buyers of Con-way Truckload, and he explained at the time that selling it would reduce the company’s debt, while keeping it would benefit from the synergy in its brokerage group, as well as reduce empty miles.

And last February, XPO said in an 8-k filing with the Securities and Exchange Commission that it planned to retain the truckload business, explaining it was holding onto it “as part of its integrated supply chain offering [and] in deciding to retain this business, the Company considered the value that shippers place on owned truckload capacity particularly in U.S.-Mexico cross-border lanes, and the opportunity to improve the utilization of the assets.

“When we bought Con-way, truckload was part of that packaged deal and a respected business with great people, but without margin-leading scale,” he said. “We had received some offers for the truckload business, but the prices were not acceptable and we would have been happy to stay in the business and keep growing truckload and were not looking for buyers. TransForce approached us with an offer that made sense for everyone. Because the price was right, and the strategic and financial goals were compelling, we cut a deal.”

Moving forward, Jacobs said XPO will remain very active in the truckload market through its truckload brokerage network, which he said is the largest in North America, its network capacity of more than 38,000 carriers, access to more than 1 million trucks it works with every day, noting XPO thrives at that level of scale.

The trucks sold to TransForce are strictly dry van, while through its brokerage operations XPO offers not only dry van but also specialized equipment like refrigerated and heavy haul.

“We complete more than 150,000 shipments a day, and we sold about 3,000 trucks in this deal, so it does not move the needle in terms of our access to capacity,” he said. “And we still have a very complimentary mix of asset-based and non asset-based services that allows us to have strategic discussions with customers. They know we have massive capacity even after the sale of the truckload division.”

While the truckload business was well established with its cross-border Mexico operations, Jacobs said XPO will remain very involved on that front, with a focus on intermodal and expedite, too. With near shoring in Mexico, he said XPO is seeing more demand for ground and air expedite service for cross-border into and out of Mexico, coupled with XPO’s truck brokerage operations on both sides of the border and a substantial contract logistics business in Mexico.

On the TransForce side, this deal provides them an established truckload operation south of border, which very much compliments its July 2014 acquisition of Transport America, an Egan, Minn.-based provider of truckload and logistics services, with 1,500 tractors and around 4,400 trailers.

“This acquisition significantly strengthens TransForce’s presence in the North American truckload landscape with prominent market positions in domestic US and cross-border Mexico freight,” said Alain Bédard, Chairman, President and Chief Executive Officer of TransForce, in a statement. “The acquisition complements our existing capabilities and gives us access to a diversified and blue-chip customer base. We have acquired a high quality truckload business with a rich heritage and demonstrated solid operating and financial performance. We believe we are investing into the truckload space at a critical time and are well-positioned to benefit from future growth opportunities.”

Cowen and Co. analyst Jason Seidl commented in a research note that this deal made sense for both XPO and TransForce. 

“When XPO acquired Con-way…was clear Menlo was the crown jewel because of the way it fit into XPO's non-asset logistics business,” he wrote. “The LTL business provided plenty of upside as well since it was the second largest in the industry, yet managed less than optimally. Con-way's truckload business was running at a low 90s OR at the time of the XPO acquisition and was a top 20 carrier. As was the case with Con-way's management in the years prior to the XPO sale, investors questioned the synergies between the TL and LTL businesses and whether it was worth divesting the non-core TL fleet. XPO management received similar questions, especially given the company's financial leverage, as well as CEO Brad Jacobs' desire to be a #1 or #2 player in each sub-segment of the business. XPO truckload would have required millions of dollars worth of maintenance capex to refresh the fleet now. It would have ultimately required millions more to more than double the size of the fleet and reach the desired ranking in the truckload hierarchy. Given the fragmented nature of the TL industry it never seemed like that was the likely outcome for XPO.”

As for TransForce, the analyst said it sounded like a US TL acquisition was not imminent on TFI's earnings call last week but the company clearly changed its tune.

“TFI has just meaningfully increased the size of its North American truckload presence,” wrote Seidl. “This acquisition will increase its truckload business by about 35 percent. CEO Alain Bedard said he expects the US truckload market 'to be getting out of that mess either early in 2017, like Q1 or Q2.' Transforce may well be on its way to splitting the company up into a truckload operator and a separate entity that focuses on the rest of its business. Perhaps this idea that management discussed in the past will be revisited.”