XPO Logistics to Acquire Pacer International

XPO Logistics and Pacer International announced that they have entered into an agreement for XPO to acquire Pacer, the third largest provider of intermodal transportation services in North America.

The combined company will continue to trade on the New York Stock Exchange under the symbol XPO.
Under the terms of the proposed transaction, shareholders of Pacer will receive $6.00 in cash and $3.00 of XPO Logistics common stock for each share of Pacer common stock, subject to a price collar, for a total market value of $335 million and a total enterprise value of $296 million. The transaction is expected to close in the second quarter of 2014, subject to regulatory clearance, Pacer shareholder approval and other customary conditions. Pacer's board of directors unanimously approved the transaction. 
Pacer, founded in 1997, facilitates approximately 10 percent of all domestic intermodal freight movements, and is the largest provider of intermodal services between the U.S. and Mexico. For the trailing 12 months ended November 30, 2013, Pacer generated total revenue of $1.0 billion, with 30 locations and approximately 950 employees.
Highlights of the proposed transaction
  • As of January 3, 2014, the consideration represents a premium of approximately 8 percent compared to the closing price of Pacer common stock on January 3, 2014, and a premium of 22 percent compared to the average closing price over the last 90 trading days.
  • Each share of Pacer common stock will be converted into $6.00 in cash and a number of shares of XPO Logistics common stock equal to $3.00, with such number based on the volume weighted average closing price of XPO Logistics common stock for the 10 trading days prior to closing (provided that this volume weighted average price is no less than $23.12 per share and no greater than $32.94 per share). If the volume weighted average price of XPO Logistics common stock during this period is above $32.94 per share, the stock portion of the consideration will be fixed at 0.0911 shares of XPO Logistics common stock for each share of Pacer, and if it is below $23.12 per share, the stock portion of the consideration will be fixed at 0.1298 shares of XPO Logistics common stock for each share of Pacer.
  • The value of the transaction represents an aggregate consideration of approximately 11.3 times Pacer's 2013 consensus EBITDA of $26.1 million, and 9.1 times 2014 consensus EBITDA of $32.6 million.
  • Bradley Jacobs, chairman and chief executive of XPO Logistics, will retain these positions and lead the combined company.
  • Daniel Avramovich, chief executive officer of Pacer, and substantially all of Pacer's executives have agreed to continue to lead the operations for XPO. Mr. Avramovich, a 36-year transportation industry veteran, will serve as chief executive officer of a newly created XPO unit, which will retain its Dublin, Ohio, operations center.
  • The company has obtained a commitment from Credit Suisse AG for up to $325 million in senior secured term loan facilities to fund the Pacer transaction and general corporate purposes, including potential future acquisitions. The transaction is not conditioned on financing.
Bradley Jacobs, chairman and chief executive officer of XPO Logistics, said, "We've viewed Pacer as a valuable acquisition candidate for quite a while. This transaction will make us the third largest North American provider of intermodal services, one of the fastest-growing areas of transportation logistics. We'll also be the largest provider of intermodal services in the burgeoning cross-border Mexico market, where growth is being driven by a trend toward near-shoring manufacturing. We expect this transaction to be significantly and immediately accretive to our earnings and accelerate our growth company-wide."
Jacobs continued, "In the last few months, we've added leading platforms in some of the fastest-growing areas of logistics: our 3PD last-mile business, our purchase of NLM - the leader in web-managed transportation for expedite - and now Pacer, our eleventh acquisition in two years. When this transaction is complete, we believe that our value proposition for customers will be among the strongest in the industry."
Daniel Avramovich, chairman and chief executive officer of Pacer, said, "After a comprehensive exploration of strategic alternatives, we are confident that a combination with XPO maximizes value for Pacer shareholders. This transaction will provide our shareholders with significant immediate cash value for their investment in Pacer, while giving them the opportunity to participate in the substantial upside potential created by bringing Pacer into XPO. This exciting combination is a testament to our dedicated employees who will have new opportunities as part of a larger organization. We will be introducing intermodal to thousands of new customers through the XPO Logistics network, and we look forward to working closely with XPO to ensure a seamless integration."
Compelling Strategic Rationale
  • The capabilities of both companies are extremely complementary. Many of XPO's 9,500 customers are small to mid-sized shippers and are candidates for conversion to intermodal for their long-haul freight spend. In addition, Pacer's existing customer base will have direct access to the freight brokerage, last-mile logistics and expedited transportation services offered by XPO. In total, the combined company will serve approximately 12,000 customers with expanded capacity and a broader range of services that should generate significant revenue growth.
  • The intermodal sector in North America has been growing at a rate of three to five times GDP, driven by an increase in shipper appreciation for the benefits of intermodal. These benefits include cost efficiencies of up to 15 percent to 20 percent, compared to trucking options; and the environmentally-friendly nature of rail's fuel consumption and carbon footprint. The combined company will be well-positioned to capitalize on these trends through its size and market relationships.
  • Cross-border Mexico is one of the fastest-growing intermodal marketplaces in North America, due to a strong tailwind in near-shoring by manufacturers. This is being driven by the relatively lower cost of shipping finished goods from Mexico versus overseas locales such as China; faster speed-to-market; an attractive cost of labor; significant investments by the Mexican government and railroads in the country's transportation infrastructure; and a business-friendly environment. Pacer's position as the largest provider of intermodal services between the U.S. and Mexico is a competitive advantage in capitalizing on demand.
  • The acquisition is consistent with XPO's strategy of building a premier supply chain offering by acquiring leading positions in the fastest-growing logistics sectors in North America. In August, XPO acquired 3PD, the largest provider of heavy goods, last-mile logistics. In December, the company acquired NLM, the leading provider of web-based freight management services for the expedite sector.
  • The timing of the transaction aligns with a favorable shift in customer behavior: many shippers are choosing to consolidate 3PL services with fewer and larger providers that have deep capacity and a broad range of services. XPO expects to significantly strengthen its relationships with customers through its enhanced value proposition.
  • Both companies have similar customer-centric cultures that inspire world-class service. XPO will benchmark the most effective practices of both organizations to create best-in-class recruitment, training, IT, marketing, sales, service and carrier procurement programs.
  • Both companies have proven teams of experienced employees who can benefit from the enhanced career prospects of a larger organization. After closing, XPO Logistics expects to have approximately 3,200 employees at 124 locations facilitating more than 22,000 freight movements a day.
Credit Suisse Securities (USA) LLC is serving as financial advisor to XPO Logistics, and Wachtell, Lipton, Rosen & Katz is acting as legal advisor. Morgan Stanley & Co. LLC is serving as financial advisor to Pacer, and Winston & Strawn LLP is acting as legal advisor.
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