RXO’s acquisition of Coyote Logistics, announced Sunday, received an enthusiastic reception on Wall Street Monday as the company’s stock price rose by double-digit percentages, a move that management believes will make it the third largest freight broker in the country. .
At around 11:15 a.m. EDT, RXO stock was up about 21.9% to $24.64, a gain of $4.43. It hit a 52-week high of $25.07 that day, according to Barchart.
Wall Street’s applause for the deal to acquire Coyote from UPS (NYSE: UPS) comes even though it involves issuing new shares to two major shareholders, MFN Partners and Orbis Investment Management Ltd. , to invest $550 million in a combination of preferred and common stocks. action. RXO is also taking on $1.1 billion in debt from Goldman Sachs for bridge loans to help it complete the transaction.
TD Cowen’s Jason Seidl said in a report Monday that RXO (NYSE: RXO) acquired Coyote for a “reasonable price” estimated at nine times projected earnings before revenue, taxes, depreciation and amortization in 2025. The price of 1.025 billion of dollars was about 12 times what RXO disclosed was Coyote’s EBITDA of about $86 million in 2023.
Seidl and RXO management, on a Monday morning call with analysts, said the Coyote acquisition would move the company into the third-largest brokerage firm. Although no other company names have been identified, the top two companies are generally CH Robinson (NASDAQ: CHRW) and TQL.
RXO’s annual revenue in 2023 was $3.93 billion. On the analyst call, RXO CEO Drew Wilkerson said Coyote’s revenue last year was about $3.2 billion.
Other details about Coyote that emerged from the conference call: It generated about $470 million in gross profit last year, for a margin percentage of about 14.5% of revenue.
Coyote’s EBITDA last year was approximately $86 million, and together, RXO and Coyote reportedly generated approximately $218 million in EBITDA last year.
Synergies related to the deal have been estimated by RXO at $25 million, and they are all expected to be realized within a year of closing, which is expected by the end of the year.
Wilkerson said the Coyote acquisition would increase the number of users of its service who generate more than $1 million in revenue with the brokerage by about 80%, although Coyote’s average customer tends to be more smaller than the average RXO customer.
The combined company will also have a more diversified business portfolio, Wilkerson added. Coyote’s two main verticals are food, beverage and transportation; RXO’s business has shifted to retail and industrial/manufacturing. “There is minimal overlap between our largest customers,” he said.
This lack of overlap received praise from Seidl. “We are encouraged to see that there is minimal customer overlap between Coyote’s business heavily focused on small and medium-sized businesses and RXO’s traditional business focused on large enterprises,” Seidl said. “There are also differences in terms of carrier base. Coyote tends to focus on smaller carriers while RXO has access to larger fleets.
One remaining customer: UPS. Wilkerson said the sales agreement with UPS contains a provision that will allow UPS to continue using RXO’s services through 2030, although the extent of the commitment was not revealed.
Jeff Kauffman, an analyst at Vertical Research Partners, explained the “opportunities to improve margins” through the Coyote acquisition.
He cited “reducing duplicate back-office costs”; echoed Wilkerson’s comments about being able to better secure purchased transportation; cross-selling of services to “a different clientele”; and the reputational enhancement that comes from being the third largest brokerage, which will help “solicit a higher level of customer freight.”
Seidl said he was revising his earnings estimates for RXO upward in 2025, when Coyote is on the ground, to EBITDA of $292 million, from $193 million without Coyote. There is no change to Seidl’s estimate for 2024, as the deal is not expected to close until the fourth quarter.
Both Kauffman and Seidl kept their stock ratings on RXO unchanged, both “hold.” “Even though the news is positive, the deal still needs to get approvals, we need to see a bottom in the brokerage and management needs to execute,” Kauffman wrote.
Although RXO boasts of its organic growth, Wilkerson noted that it has made a dozen acquisitions since 2012, including those when it was part of XPO (NYSE: differentiated has allowed us to organically grow brokerage volumes by almost 70% over the last five years, significantly outperforming the industry,” he said.
And he said he doesn’t expect the consolidation trend to stop anytime soon. “We believe there will be an increase in consolidation over the next five years and that the winner will be the one who offers the deepest customer relationships, the best technology and strong financial protocols,” Wilkerson said.
Chief Financial Officer Jamie Harris, on the call, repeated what RXO said Sunday when the deal was initially announced: the Coyote acquisition will have “an immediate and significant accretive effect on adjusted earnings per share.” and adjusted cash flows.”
Several times during the call, RXO management touted the deal’s benefits of taking the combined fixed cost structure and spreading it across a broader book of business. “We will be able to continue to optimize our cost structure and operate our fixed costs more efficiently,” Harris said.
Jared Weisfeld, RXO’s chief strategy officer, said Coyote’s business is about 79 percent truckload, with the remainder made up of less-than-truckload and, to a lesser extent, intermodal. He added that he expects the acquisition to help RXO increase its presence in small and medium-sized businesses and the “middle market.”
A merger of two brokerage firms always raises the question of the pace and direction of technology integration. In response to an analyst question, Wilkerson said Coyote “has invested in technology and has a solid operating system.”
“We have the opportunity to be able to get the best of both worlds and continue to have the best transportation technology in the world.”
In a report released before the conference call, Bascome Majors of Susquehanna Financial Group raised a question: Will the talent stay?
Its report, when discussing the risks of the deal, cited the “disynergy risk of employee turnover that is inherent in all acquisitions of people and asset-light transportation technologies.”
More articles from John Kingston
NFI CEO Brown indicted in sweeping New Jersey case against political giant
S&P downgrades Forward Air’s debt rating again; 3 key agencies now at the same low level
Trucking jobs fell in May; the total now corresponds to November