One month after completing its offering of $125 million convertible notes, XPO Logistics (XPO) landed a deal to acquire OHL's truck brokerage arm, Turbo Logistics, for $50 million. The deal is expected to be accretive to earnings immediately.
The purchase price represented 0.40x Turbo's gross sales (ttm ending 9/30/2012) of $124 million and 7.25x its 2011 EBITDA ($6.9 million).
In May, company CEO Bradley Jacobs told analysts on its 1Q12 earnings conference call that the purchase price depends on the acquired company's size. A business generating around $1 million EBITDA and below is probably reasonably valued at around 4x EBITDA. One that's generating a few million dollars EBIDTA can be valued a bit higher ("a few turns more" in Brad's original words). One that has an annual EBITDA of $10 million or more might be valued at a high-single-digit multiple of EBITDA. Turbo's purchase price of 7.25x EBITDA (2011) looks roughly in line with his guidance.
A Quick Comparison of Three Acquisitions
Including Turbo, XPO has so far acquired three truck brokerage companies.
Back in May, XPO acquired Continental Freight Services for $3.5 million, or 0.16x gross revenue (ttm ending 3/31/2012) of $22 million and about 4x EBITDA of less than $1 million. In August, the company also acquired Kelron Corporate Services for $8 million, or 0.08x its gross revenue (ttm ending 6/30/2012) of $100 million.
Kelron was not profitable at the time of acquisition and had a working capital problem. At March 31, 2012, right before being acquired by XPO, the company was running a working capital deficiency of $1.9 million. For the twelve months ending 3/31/2012, gross revenue increased 5.6%. However, they generated an operating loss of $1.3 million and a negative EBIDTA of $832,000.
Among the three businesses XPO acquired so far, Turbo had the highest gross sales and profitability (5.6% EBITDA margin, a rough estimate based on EBITDA for 2011 divided by gross revenue ttm ending September 30, 2012, vs. Continental's estimated 4% and negative for Kelron) right before being acquired. Moreover, it also grew the fastest among the three. Since 2009, Turbo has consistently grown top line at a high-single-digit to low-double-digit annual clip.
In comparison, Continental barely grew in the past few years though the business was well run and profitable. One of the shortcomings Continental had was that it did not have adequate capacity to meet customer needs. After being acquired the business was growing quite nicely with the extra capacity that XPO's central operating center in Charlotte is providing. Continental is now covering about one third of its capacity through Charlotte.
Kelron, on the other hand, had quite a few money-losing customer accounts that XPO had to let go after the acquisition. In addition, since most of the operation was based in Canada, currency conversion and language translation (French for Montreal) have slowed down the integration process. Management expects the integration process will last into at least the first quarter of 2013.
For Turbo, investors can expect the integration to be as smooth as Continental. Normally, management targets 90 days to completely integrate an acquired business into its IT system.
So far, all the three acquisitions fit in nicely within the company's sweet spot of $20 million to $200 million annual revenue range. The following table gives a quick rundown of the three acquisitions completed so far this year.
Kelron Corporate Services
Continental Freight Services
Oct. 25, 2012
Aug. 3, 2012
May 8, 2012
Gross revenue ttm
$6.9 million (2011)
Top line growth
High single digit to low double digit since 2009
5.6% (year ending March 2012)
Mostly flat top line.
11.8% (year ending March 2012)
Working capital shortage
Yes. Deficiency of $1.9 million March 2012
Headquarter and main branches
Gainesville GA, Reno NV, Dallas TX, Chicago IL
Toronto, Vancouver, and Montreal in Canada, Cleveland OH
Columbia SC, branches in NC, SC, FL, and TX
- Calculated based on P/EBITDA multiple of 4x, revealed in the company's Q1 conference call by analysts and management. Will update the value in the Comments area once I verified with the management.
- This is a rough estimate. It was calculated as EBITDA (2011)/Gross margin (ttm ending 9/30/2012).
- Info not available from XPO's press releases, conference calls and public filings. Will update it in the future as info becomes available.
Scalability and Synergy
Throughout these acquisitions, XPO management has consistently repeated the message that the top factor they have in mind in pursuing an acquisition is scalability. Management's general objective is to triple or quintuple the acquired business' top line in three to five years. So, the acquired entities have to be highly scalable for the company to achieve this goal. For Continental, management has set a specific target to triple its top line in the next few years.
In the Turbo case, the management pointed out three reasons why Turbo will be a highly scalable business.
Firstly, Turbo's Gainesville and Reno branches are near major colleges that offer a combined student population of 88,000 that XPO can hire as salespeople in the future. Turbo's two other major branches Chicago and Dallas will be merged with XPO's two cold starts to create a large, scalable platform.
Hiring young college graduates enables the company to generate high returns on low invested capital. The company has developed a comprehensive recruiting and training program to develop these young graduates into motivated and productive salespeople. About two thirds of the new hires are recent college graduates or other juniors who have just begun a career in the transportation industry.
The second reason management cited is the great team Turbo has in place, with the two top leaders Messrs Coker and Battle having a combined thirty three years of career experience with Turbo in every area of the brokerage food chain.
Thirdly, Turbo serves a very attractive end market. The major verticals are dry van (45% of revenue), temperature controlled or reefer (31%), and expedited (16%). The remaining 8% are flatbed, intermodal, and LTL (Less Than Truckload).
Obviously XPO has the potential to generate a lot of synergy between Turbo and its Express-1 division. Prior to the Turbo acquisition, the company has identified three verticals as the main focus to grow its expedited service: cross-border Mexico, temperature controlled and defense. Revenue from these three areas grew 21% in Q2. The Turbo acquisition will serve to increase XPO's presence in the temperature controlled and expedited area, both in terms of customers (shippers) and capacity (carriers).
The Turbo acquisition will bring in 600 customers (mostly mid-sized and large customers) in retail, manufacturing, and food and beverage industries. In addition, it is also bringing in 10,000 carriers, the majority of which is expected to increment XPO's current carrier base of 15,000. Management expects the combined carrier base to exceed 20,000 after the acquisition.
Year End Target
With the three acquisitions (combined revenue of $246 million) made so far, the company has roughly met its own year-end target of $250 million revenue run rate from acquisitions. It is also on its way to meet its year-end total revenue run rate of $500 million by the end of the year.
In terms of new acquisitions in the immediate future, management has told multiple sources (including on the Turbo acquisition conference call) that they are likely to complete another deal either in the remainder of the year or the first quarter of 2013.
If one more acquisition is done before the year ends, the management will have brown away its year-end revenue (run rate) target of $250 million from acquisitions and $500 million total.
Take Away from the Acquisitions
Perhaps the most important take away from the three acquisitions is the company's obsession with scalability, which is critical to the company's phenomenal future growth.
Secondary to this, it's probably the company's discipline in evaluating opportunities, pricing deals and scaling up or growing the acquired units. Like with the two other prongs of the company's strategy, cold starts and operation optimization, the company has a well-defined business plan from the beginning. So the company has a playbook to stick to in every step of its execution. As predictable as day following night, each of the acquired units is integrated into their central IT platform, ramped up with new sales people, and given extra capacity through the company's Charlotte operation center.
The Big Picture
Acquisition is XPO's most important component in fulfilling its goal of becoming one of the country's largest truck brokers. Jacobs told analysts on its Turbo acquisition conference call that he sees XPO eventually becoming the nation's second (or third or fourth for that matter) largest truck broker.
Truck brokerage is a very fragmented industry with the vast majority of the 10,000 licensed, mostly small truck brokers waiting to be acquired. Jacobs-led XPO is the first mover aiming to consolidate this industry on an immense scale. In Q1's conference call, Jacobs told analysts that there was not a lot of competition for the acquisition targets. This is good news for XPO investors because XPO as an early consolidator will be able to pick up the small truck brokers on the cheap, thus enhancing the potential to create shareholder value in the long run.
Furthermore, the trucking industry is now only about 15% penetrated by brokerage firms. Jacobs believes that eventually the penetration rate will grow to up to the 50% level.
With this huge market potential, Jacobs has set his vision on the long run. He sees freight picking up strongly once the GDP growth recovers to a more normal level in the years ahead. After all, the truck brokerage industry has traditionally grown at 2x to 3x the overall GDP growth rate. Once the freight comes back, Jacobs believes the capacity will be tight and whoever has it will command an outsized market share at the expense of the smaller players.
Other Relevant Factors to Consider
Many investors get excited when they find out that an activist investor like Carl Icahn or Bill Ackman has invested in a company and joined the company's board. With XPO, you are looking at a company still majority-owned by the management on a fully-diluted basis. Not only has the private investor Bradley Jacobs joined the board, he has also taken over the company and is running it himself with his past series of consistently successful experiences in creating multibillion-dollar enterprises.
I'm a believer of his past success and an XPO bull. But you don't have to take my words for it. In September, Wellington Management, a leading global asset management firm with $720 billion of assets under management, became a 10% owner. In Q3, they added 1.25 million XPO common shares and brought their total ownership to 2.06 million shares, which was more than double that of the 809,820 shares they owned at the end of the second quarter.
As the economy remains soft, more and more money will be chasing names with capability to grow against the crowd. Not only will XPO be able to grow in a weak economy, it might well turn out to grow nicely in the next few years no matter what the macro environment is.
Disclosure: I am long XPO.