XPO arguments rage on

A hedge fund called Spruce Point Capital Management issued a report earlier in the week suggesting that XPO has problems. Spruce Point made some rather dramatic suggestions. On the finances of XPO, it opined that it “has completed 17 acquisitions since Jacobs took control in 2011 and deployed $6.1bn of capital. Yet by our calculations, the company has generated $73m of cumulative adjusted free cash flow in an expansionary economic period. In our view, this is indicative of a failed business strategy yielding a paltry 1.2% return on invested capital. XPO is dependent on external capital, asset sales, and factoring receivables to survive and is covering up a working capital crunch that can been seen by bank overdrafts…. As credit conditions tighten, cost of capital increases, and XPO’s business practices come under greater scrutiny (eg. U.S. Senate), its share price could swiftly collapse in Enron-style fashion.”

That is not all. Spruce Point questions the integrity of XPO’s management; “CEO Jacobs has surrounded himself with a web of associates from his United Waste Systems and United Rentals days. Two of his partners, Mike Nolan and John Milne, were convicted of accounting fraud. XPO’s director G.C. Andersen recently employed Milne at his financial advisory firm during a time the company worked on private placements (potentially XPO’s deals) and was sanctioned by FINRA. This wasn’t disclosed to investors. XPO’s audit committee director, Adrian Kingshott, has omitted from his bio his role in the distribution of note securities in the $700m Marc Drier Ponzi scheme.”

These are strong allegations.

And not all agree with Spruce Point’s view of XPO. Analysts from Deutsche Bank said the hedge fund’s report had “highly misleading statements and inaccuracies related to basic calculations”. Credit Suisse were of a similar mind.

So, who are Spruce Point Capital Management? Founded by two former investment bankers the firm looks to exploit what it describes as “short-selling, value, and special situation investment opportunities”. In the business of short-selling, getting a story into the media about how your target company is failing is key to getting the share price to fall, thus making a profit for the short-seller.

It is not very surprising that XPO Logistics divides opinion. It is a company that has grown extraordinarily quickly in a short space of time. Creating one of the world’s largest logistics service providers from nothing through a strategy of acquisition was always going to be demanding in terms of both debt and equity. Getting high profit margins and high growth in logistics is hard. What is probably of greater importance for the long-term prospects of XPO Logistics is its ability to manage itself. Spread across North America and Western Europe and spanning the road freight, contract logistics, freight forwarding and even the last-mile markets, its management has an enormous task on its hands. Managing such complexity is the real challenge for Bradley Jacobs and his team. 

Source: Transport Intelligence, December 20, 2018

Author: Thomas Cullen


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