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.

A full integration of XPO Europe would be helpful if the logistics company wanted to buy Ceva, which may have a valuation in a sale of between $1.5 billion to as high as $3 billion based on its $254 million in 2016 Ebitda.

Alternatively, Kevin Sterling, an analyst at Seaport Global, suggests that XPO Logistics would likely need to tap the capital markets with an equity offering if it were going to make a large acquisition. A move to hike XPO's leverage to fund a big purchase would likely raise shareholder questions, Sterling said. "They still have a fair amount of leverage [on the books]." 

And shareholders are already a big skittish. Roughly 47% of the shares voted at XPO Logistics' May annual meeting, not including Jacobs' significant stake, opposed C-Suite pay packages, suggesting that a large contingent of investors may not be happy with the company's strategy.

Also, there would be integration problems. An acquisition of Ceva would likely solve the last mile logistics problem for XPO in Europe. "If they were able to put the two together, they could facilitate seamless global trade," Sterling said. "If you could put the two together, you would want to put everything on one system, with cost synergies rather than having two different back office platforms."

However, XPO wouldn't be able to fully integrate the business with XPO Europe without coming afoul of French rules designed to protect the interest of XPO Europe shareholders. It may have similar integration problems with other acquisitions. 

In fact, there already are integration problems. XPO can't fully integrate a U.S. unit, Jacobson Companies, which was acquired in 2014 by Norbert even though it is a business that has some operations that overlap with XPO U.S.

Fully integrating Jacobson would allow the parent company to move assets around the balance sheet, which they can't do right now. There are potential conflict issues, a person familiar with the situation said. He suggested that when a potential customer calls up XPO Europe seeking to do business in the U.S. that customer would need to be routed to Jacobson, not XPO U.S. A referral to XPO U.S. could go against French law because it could be seen as extracting value at the expense of XPO Europe's shareholders, he added.

Elliott raised the possibility of conflicts on Thursday at XPO Europe's 2017 annual meeting, where the activist fund sought unsuccessfully to elect a dissident director to the company's supervisory board. With XPO Logistics owning about 86% of XPO Europe Elliott's director didn't stand a chance at being elected. Nevertheless, the fund urged shareholders also to vote against XPO Europe director Troy Cooper, who they argue is conflicted. Cooper, the Chief Operating Officer of XPO Logistics, likely spends much of his time focusing on the U.S. XPO business and not the Norbert operation, they argue.

Editor's Pick: This article was originally published on July 5, 2017.

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