How an Activist Is Complicating Bradley Jacobs' XPO Acquisition Strategy

XPO Logistics Inc. (XPO) CEO Bradley Jacobs is known for his rollup M&A approach to running companies.  

After a two-year break from deal-making, the Greenwich, Conn.-based logistics company, under Jacobs' oversight, is once again interested in making acquisitions. The logistics company could pay "several billion dollars" for an acquisition and would likely buy a company with over $500 million in Ebitda; Jacobs recently told reporters.

Speculation has emerged that XPO Logistics could be interested in acquiring Ceva Logistics, a privately-held freight management company with global operations owned by private equity giant Apollo Capital Management.

However, such an acquisition would face complications from a previous purchase that the company has yet to fully close. In 2015, XPO acquired Norbert Dentressangle SA, a French trucking and logistics company, in a $3.5 billion deal. Only they had a problem: Billionaire activist investor Paul Singer and his Elliott Management.

The insurgent fund accumulated shares in Norbert in April 2015, shortly after XPO announced its offer to Norbert, eventually acquiring a 9% stake as part of a so-called "bumpitrage" strategy pushing for a higher price. The activist has argued that the XPO offer did not represent a fair value considering Norbert's big European trucking fleet and U.S. operations.

However, the Elliott stake is so large that, due to French law, XPO has been unable to eliminate all the company's minority shareholders and fully close the acquisition of Norbert, which has since been renamed XPO Europe. And due to French rules, those shareholders, led by Elliott, have a series of rights, including legal restrictions on the use of cash sitting on Norbert's balance sheet and a requirement that the European unit continues to be publicly traded and have an independent board with annual meetings.

So, if XPO wants to get more cash out of its European unit, say to help with a multibillion-dollar acquisition of Ceva or another company, it needs to pay a dividend to itself, which would include a hefty dividend to the 13% minority holders.

By not taking that approach, XPO has engaged in some contortions to extract capital from the French unit without reaching a deal with the activist fund. For example, XPO arranged for XPO Europe to take out roughly $900 million in loans from the parent at a 5.625% interest rate to retire some of its public debt.

XPO can upstream millions annually through the loans, but they still leave a lot of cash behind. The unit generates lots of cash flow, which could be used to raise debt to fund a major acquisition but only if XPO Europe is fully integrated into the parent business. Also, there is about €115 million on XPO Europe's balance sheet.

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