XPO gets $700 million equity infusion from two Canadian pension funds, one in Singapore

XPO Logistics Inc. said late yesterday it will receive a $700 million capital infusion from two Canadian pension funds and a sovereign wealth fund in Singapore and will use the proceeds to finance what could be a significant acquisitions spree over the next 18 months.

Greenwich, Conn.-based XPO also raised its revenue and income targets for 2017. XPO now plans to generate about $9 billion in annualized revenue by that time, up from the prior target of $7.5 billion. It now expects to report $575 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2017—up from $425 million projected previously. XPO revised its targets because the company now has significantly more liquidity to execute accretive acquisitions, Bradley S. Jacobs, XPO's founder, chairman, and CEO, said in a phone interview today.

The new investors are GIC, Singapore's fourth largest sovereign wealth fund; PSP Investments, a Montreal-based pension fund that invests on behalf of the country's civil servants and the Royal Canadian Mounted Police, among others; and the Ontario Teachers' Pension Plan, which invests for approximately 400,000 teachers in the province. Under the arrangement, the entities will buy XPO shares priced at $30.66 a share, a 5-percent discount from the average share price calculated over the prior 20 trading days dating back from yesterday. XPO will gain access to the funds on Sept. 17.

The combined entities will control approximately 22 percent of XPO stock. Jacobs Private Equity LLC, a corporation controlled by Jacobs and his wife, will remain XPO's largest shareholder with a reported 24-percent stake. Jacobs declined to disclose the amount of each firm's investment.

After deducting about $10 million in expenses, the infusion will leave XPO, a third party provider that operates in freight brokerage, expedited transportation, last-mile delivery, and freight forwarding, about $690 million to spend, Jacobs said. Currently, XPO has about $300 million of liquidity in cash, cash equivalents, and access to lines of credit based on the value of certain assets, Jacobs said. In addition, XPO can leverage the new investments to generate additional borrowing capabilities. In all, XPO will have more than $1 billion available for acquisitions.

Jacobs said that the "acquisition pipeline is very active" at this time and that it shows little signs of slackening. XPO is exploring opportunities across its four main businesses, Jacobs said. It has no plans to expand into segments of transportation and logistics that it is not already involved in, he added. He said that 2015 will be a busy year for XPO on the acquisition front.

Discussions with the new investors began only a few weeks ago after XPO told its investment adviser, Morgan Stanley & Co., that it was interested in additional capital to take advantage of a myriad of acquisition opportunities available to it, Jacobs said. XPO would not be short of capital if the investments didn't happen, Jacobs said. However, the new capital infusion "gives us a lot of firepower," he added.

John G. Larkin, lead transportation analyst for Stifel, Nicolaus & Co., said in a research note today that he wouldn't be surprised if XPO made a play for a large, privately held brokerage firm, especially since the company has in the past year moved away from acquisitions in brokerage, which remains its core business. Larkin added that the company has expressed interest in adding heft to the "last-mile" delivery market following its July 2013 purchase of 3PD Inc., the biggest provider of delivery services. Last-mile providers typically deliver heavier weighted goods such as appliances and desks from distribution centers and stores to residences, businesses, and job sites.

When he formed XPO in 2011, Jacobs said he would primarily pursue acquisitions of truck brokers in an effort to consolidate a large but fragmented market. In the past year or so, XPO has shifted its acquisition focus to companies like 3PD; intermodal service provider Pacer International; and, most recently, New Breed Holding Co., a leading contract logistics provider, which XPO acquired for $615 million in cash, its largest deal to date. Jacobs said the recent moves are designed to round out XPO's product offerings and to synchronize multiple components of the logistics business under a single company.

Jacobs said in a later email that he had not read Larkin's note and couldn't comment on specifics. "We are talking to lots of people in all our verticals," Jacobs said. The analyst said he had no knowledge of any pending deals involving XPO.

Following the news of the capital infusion, Larkin raised his 12-month target price on XPO to $45 a share from $37 a share. Shortly past the mid-point of today's New York Stock Exchange session, XPO stock was up $3.73 a share to $37.78. Earlier in the session, the stock had touched a new 52-week high of $39.28 a share.