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February 3 2020

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58 The Journal of Commerce | Februar y 3 2020 Surface Transportation XPO LOGISTICS' DECISION to sell or spin off as many as four of its trans- portation and logistics businesses could leave the company much smaller but more tightly focused on its North American less-than- truckload (LTL) operations. In a Jan. 15 statement announc- ing the potential divestments, XPO drew a bright red line around its US-based LTL division, insisting the third-largest US LTL company is not for sale. In fact, XPO becoming a "pure-play" LTL carrier could be a good thing, according to chairman and CEO Bradley S. Jacobs. "If we end up selling all four of the business units — and that's not a foregone conclusion — we would be a pure-play LTL trucking company with no net debt and many billions of dollars in cash in a publicly traded vehicle," Jacobs told The Journal of Commerce on Jan. 16. Which of those four units might be sold or kept is still unclear, how- ever, as XPO characterizes its current plan as an open-ended "exploration of strategic alternatives." The sale or spin-off of any of the four units would mark a watershed in XPO's history. Jacobs launched the company with a $150 million investment in Express-1 Expedited Solutions in 2011, using acquisitions to build XPO into a global logistics company with $17.3 billion in gross revenue in 2018. As recently as the third quarter of 2019, Jacobs told investment analysts he was consid- ering additional acquisitions. The reason for the sudden shift in strategy lies on Wall Street, rather than in the short-term performance of individual business units. How- ever the exploration of alternatives unfolds, Jacobs is intent on keeping LTL in XPO. "We do not intend to sell or spin off our North American LTL business, given its growth trajectory, and we believe LTL as a pure-play would be well understood and prop- erly valued by Wall Street investors," he said. "We have a tremendous track record of creating shareholder value, and selling or spinning off these units could be a way to create even more value this year." That's potentially good news for US shippers, who could benefit from increased investment in and expansion of XPO's LTL business. "We have many technology projects under way in LTL, from linehaul optimization to dynamic pickup and delivery routing to the use of AI [artificial intelligence] algorithms that incorporate customer behavior to find the right price," Jacobs said. XPO's LTL unit, with headquar- ters in Ann Arbor, Michigan, has 290 terminals, about 8,000 tractors, and 13,000 truck drivers in the US and Canada. The company serves shippers in more than 75,000 next- day and two-day lanes, according to XPO's most recent annual report. From 2015 through 2018, the LTL unit's annual revenue increased 7.2 percent to $3.8 billion. The LTL unit's profitability improved more dramatically, how- ever, as XPO worked to transform the former Con-way Freight. In the fourth quarter of 2015, the LTL carrier's adjusted operating ratio, a measure of profitability, was 93.3 percent. In the third quarter of 2019, XPO's LTL operating ratio was 80.8 percent. The four businesses XPO is con- sidering divesting are its European supply chain and transportation businesses, its North American transportation business (excluding LTL), and its supply chain business in the Americas and Asia, Jacobs said. That covers much of the company, including the truck brokerage busi- ness that gave XPO its start. Those businesses each would become large standalone companies if they were spun off. "They're all top-three leaders in their space," Jacobs said. In 2018, XPO's freight brokerage unit reported $2.92 billion in gross revenue, while its last-mile division had $1.07 billion in revenue and its European transportation and logistics units brought in $2.87 billion — nearly 40 percent of the company's total revenue that year when combined. In the first nine months of 2019, XPO Logistics reported total revenue of $12.5 billion, about 2.9 percent less than in the same period of 2018. Its LTL unit accounted for $2.9 bil- lion in revenue in that period, about half of XPO's total North American transportation revenue. North Amer- ican and European logistics revenue Trucking | Rail | Intermodal | Air & Expedited | Distribution 'Pure-play' proposition XPO mulls downsizing to unlock LTL value By William B. Cassidy "If we sell all four of the units — and that's not a foregone conclusion — we would be a pure-play LTL trucking company with no net debt and billions of dollars in cash."

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