RXO’s acquisition of Coyote Logistics announced on Sunday got a tumultuous reception on Wall Street on Monday, with the company’s stock price trading up double-digit percentages in a move that management said will make it the third-largest brokerage of goods in the country. .
As of 11:15 a.m. EDT, RXO stock was up about 21.9% at $24.64, a gain of $4.43. It hit a 52-week high on the day at $25.07, according to Barchart.
Wall Street’s applause for the deal to buy Coyote from UPS (NYSE: UPS ) comes even as it includes the issuance of new equity to two major shareholders, MFN Partners and Orbis Investment Management Ltd., to invest $550 million for a combination favorite and shared. shares. RXO is also taking on $1.1 billion in debt from Goldman Sachs to help complete the transaction.
TD Cowen’s Jason Seidl said in a report Monday that RXO (NYSE: RXO ) had acquired Coyote for a “reasonable price” of nine times estimated earnings before income, taxes, depreciation and amortization in 2025. The price of The $1.025 billion was about 12 times what RXO revealed was Coyote’s EBITDA of about $86 million in 2023.
Seidl and RXO management, in a Monday morning call with analysts, said the Coyote acquisition will move the company to the No. 1 brokerage. 3. While the names of the other companies were not identified, the first two are widely believed to be CH Robinson (NASDAQ: CHRW ) and TQL.
RXO’s full-year 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 margin last year, for a margin percentage of about 14.5% of revenue.
EBITDA for Coyote last year was about $86 million, and combined, RXO and Coyote would have generated about $218 million in EBITDA last year.
Synergies in the deal were valued by RXO at $25 million and are all expected to be realized within one year of closing, which is expected by the end of the year.
Wilkerson said the Coyote acquisition will increase the number of users of its service who make more than $1 million in brokerage income by about 80%, although the average Coyote customer tends to be smaller than the average RXO customer.
The combined company will also have a more diverse book of business, Wilkerson added. Coyote’s two main verticals are food and beverage and transportation; RXO’s business has tended toward retail and industrial/manufacturing. “There is minimal overlap between our largest customers,” he said.
This lack of overlap drew praise from Seidl. “We are encouraged to see that there is minimal customer overlap with Coyote’s business focused heavily on small and medium-sized businesses and RXO’s legacy business focused on larger enterprise customers,” 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 customer that’s been hanging around: UPS. Wilkerson said the sale agreement with UPS contains a provision that would allow UPS to continue using RXO’s services through 2030, although the size of the commitment was not disclosed.
Seidl said he was raising his estimated earnings for the RXO in 2025, when the Coyote will be in the field, to an EBITDA of $292 million, from $193 million without the Coyote. There is no change in Seidl’s estimate for 2024, as the deal is unlikely to close until the fourth quarter.
Although RXO has touted its organic growth, Wilkerson noted that it has made a dozen acquisitions since 2012, including when it was part of XPO (NYSE: XPO ) before it was spun off in 2022. “Our differentiated approach has enabled us to organically grow brokerage volumes by nearly 70% over the past five years, significantly outperforming the industry,” he said.
And he said he doesn’t expect the consolidation trend to end anytime soon. “We believe there will be an increase in consolidation in the next five years, and the winner will be whoever offers the deepest customer relationships, the best technology and the strongest financial protocols,” Wilkerson said.
CFO Jamie Harris, on the call, reiterated what RXO said Sunday when it first announced the deal: The Coyote acquisition will be “immediately and significantly accretive to adjusted earnings per share and adjusted cash flow.”
Several times during the call, RXO’s management touted the benefit from the deal 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 use our fixed costs more effectively,” Harris said.
Jared Weisfeld, RXO’s chief strategy officer, said Coyote’s business is about 79% truckload, with the balance in less than truckload and to a lesser extent intermodal. He added that he expects the acquisition will help RXO increase its footprint in the small and medium business and “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 they have a strong operating system.”
“We have an opportunity to be able to get the best of both worlds, to continue to have the best transportation technology in the world.”
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