XPO Logistics break-up plan is for shareholders, not operational benefits

XPO Logistics chairman and chief executive officer Bradley Jacobs was grilled by market analysts at a conference call yesterday on why he is considering a break-up of the company.

Last month, the US-based transport and logistics giant announced that it was undertaking “a review of strategic alternatives”, including the possible sale or spin-off of one or more of the company’s business units. XPO’s transportation and logistics businesses, including those in Europe, could be sold off, but the company confirmed that its North American less-than-truckload (LTL) unit, accounting for around 22% of global revenues, was unlikely to be part of the review.

The conference call came as XPO published its full-year 2019 results with Jacobs commenting that company-wide, it had “delivered a good quarter and a good year, despite a choppy macro” and went on to express optimism in the company’s performance in 2020.

He added: “As you know, on 15 January, we announced we’re exploring the sale or spin-off of some of our business units. As we said, we’re not considering the sale or spin of North American LTL. This process is consistent with our long-held priority of maximizing shareholder value.

“We’re proud of the outsized returns we’ve already delivered for our shareholders, but we continue to trade at a significant discount to the sum of our parts and to the valuation of our pure play peers. The process is off to an excellent start, but we have no updates to share with you on this call.”

However, Jacobs was pressed by analysts to elaborate on his argument for breaking up the company and pursuing a possible asset sale, particularly at a time when management was talking about a potentially 50% improvement in earnings – of between $700 million to $1 billion – in the next couple of years under its current structure.

He replied: “The possibility to continue in an ‘intact’ company with the profit improvement opportunities of up to $1 billion is very attractive, frankly. And that’s not a bad plan B; it’s an actually an excellent Plan B. But Plan A is to get more shareholder value creation in the here and now, because the reality is that the market has given us what we call a conglomerate discount and we trade at a very significant discount to the sum of our parts, as well as evaluation of our peers.

“And therefore, if we take these four business units and market them in sales, there’s a very good chance that we’re going to get multiples that exceed by substantial amount what we trade for, as a conglomerate, so to speak. And while we’re in love with the multimodal solution and the global reach, the market does not reward us for that. And as the saying goes, don’t fight with reality, because reality always wins.”

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