XPO crosses the pond in earnest as it drops $3.5 billion for Norbert Dentressangle

Brad Jacobs is shopping in Europe, and he has brought the big wallet.

Jacobs, the founder, chairman and CEO of freight broker and third-party logistics provider XPO Logistics Inc., announced last night one of the most ambitious bets in the 3PL industry's history by acquiring French transport and logistics giant Norbert Dentressangle S.A. for US$3.53 billion in cash and debt. The acquisition, the largest of Jacobs' acquisitive three-decade career spanning multiple industries, catapults Greenwich, Conn.-based XPO into the global big leagues by taking out one of the continent's most visible logistics operators.

Under the deal's terms, founder Norbert Dentressangle will sell his family's 67-percent ownership in the Lyon, France-based company for 217.50 euros per share. XPO will then tender for the balance of Dentressangle shares at the same price. The deal's value represents a 37-percent premium to Dentressangle's April 27 closing price.

Not since Deutsche Post DHL's US$6.7 billion purchase of the U.K. contract logistics provider Exel in 2005 can anyone remember a deal this large that involved a mostly nonasset-based provider. Dentressangle's capital expenditures equal just 2.5 percent of revenue, meaning its "asset intensity" is low, according to XPO.

The deal, slated to close by the end of June, will push XPO's annualized revenue to $8.5 billion, about two years ahead of its initial timeline for hitting that mark, the company said. Hervé Montjotin, Dentressangle's chairman and CEO, will become CEO of XPO's European business and president of the parent company, XPO said. Dentressangle will retain its Lyon headquarters, and XPO has pledged to keep all of the company's full-time employees for at least 18 months from the deal's closing date.

The Dentressangle name, which has been around since 1979, will disappear once the deal closes, and the business will be known as XPO Logistics. Jacobs said in an interview late last night that all of XPO's operating companies that have been known by other names, such as XPO Last Mile for its last-mile delivery business, have been rebranded under the XPO Logistics name.

In Dentressangle, XPO acquires a company that, in Jacobs' words, "is a mirror image of our own, only in Europe." Of Dentressangle's US$5.5 billion in 2014 revenue, about $2.7 billion comes from contract logistics (a somewhat fancy term for warehousing); $1.2 billion from freight brokerage; and $1.1 billion from company-owned, independently operated, and dedicated over-the-road trucking services. The balance comes mostly from air- and ocean-freight forwarding.

Retail and Fast Moving Consumer Goods (FMCG) customers account for 70 percent of Dentressangle's contract logistics business, according to Armstrong & Associates Inc., a consultancy. Dentressangle is also a leader in the handling of bulk and temperature-controlled goods, with 3.9 million cubic meters of temperature-controlled storage volume under foot, Armstrong said.

Both companies have been acquisitive, and have leveraged their dealmaking to expand into virtually all areas of logistics. For example, XPO was founded in 2011 with the objective of building footprints in brokerage, freight forwarding, expedited transport, and intermodal. Since then, it has expanded into contract logistics, transportation management, and last-mile deliveries, and gotten deeper into intermodal than Jacobs originally envisioned with its 2014 purchase of Dublin, Ohio-based Pacer International.

Jacobs said in the interview that XPO's penetration into other segments was driven by his desire to be a "comprehensive solutions provider," and by demands from shippers in the U.S. and abroad to work with a smaller universe of vendors with a myriad of service offerings integrated under one roof.

The U.S. accounts for about 26 percent of Dentressangle's contract logistics business, most of which came from its $750 million acquisition last July of Des Moines, Iowa-based Jacobson Cos. Jacobs said XPO became interested in Dentressangle after finishing second in the bidding for Jacobson. "We wanted to know more about who beat us," he said. After researching the company, Jacobs said the fit between the two firms was so compelling that he sought to begin talks in earnest.

The deal was finalized in the past two weeks during round-the-clock negotiations, Jacobs said. The strengthening of the U.S. dollar against the euro proved a tailwind, making XPO's purchase price about 20 percent cheaper than it would have been a year ago. "We are buying at an opportunistic time," Jacobs said. He added, though, that the bigger bang for the acquisition buck was "just a side benefit."

XPO gets a foothold in a region that is roughly twice the size of the U.S. market, and perhaps more importantly, is in the early stages of outsourcing logistics activities. Jacobs estimated that only about 27 percent of European firms currently outsource their logistics work. XPO also said it would gain traffic density on road lanes covering about 90 percent of the Eurozone's GDP-producing regions.

Jacobs' pivot to Europe comes on the heels of XPO losing out on several attractive bids. Besides the Jacobson deal, it saw Singapore-based 3PL provider APL Logistics fall into the hands of Japanese giant Kintetsu World Express—thwarting Jacobs' desire to establish a foothold in the trans-Pacific market--and, most recently, Command Transportation LLC—a Chicago-based truckload broker that Jacobs coveted—acquired by Echo Global Logistics Inc.

Jacobs has said he will not overpay for a potential asset no matter how desirable, and it is believed the winning bidders in those deals went to levels that XPO would not match. Dentressangle was purchased at a multiple of 9.1 times projected 2015 earnings before interest, taxes, depreciation, and amortization (EBITDA). In today's M&A environment, that is considered a reasonable multiple for a well-regarded 3PL.

John G. Larkin, lead transport analyst for investment firm Stifel, Nicolaus & Co., said in a note last night on the Dentressangle deal that "we, and most others we suspect, were not thinking of European companies as acquisition targets, and we were not contemplating companies of this size."

In the interview, Jacobs said XPO had been "quietly talking" to other European companies about possible tie-ups. Now, with a highly visible asset like Dentressangle in tow, those conversations will likely take on more intensity, he said.