For truckload brokerage firms, big is better.
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And RXO Inc. will join the ranks of the big players when it closes on its $1.025 billion acquisition of Coyote Logistics at the end of 2024. The transaction is expected to catapult RXO to the third largest North American freight broker, essentially taking over the spot held by Coyote. C.H. Robinson Worldwide holds the top spot as the largest freight brokerage firm, followed by Total Quality Logistics. RXO was spun off from former parent XPO in November 2022.
RXO is currently the eighth largest, according to TD Cowen analyst Jason H. Seidl. He described the purchase price as “reasonable” and “at the low end of what we anticipated Coyote would sell for.”
“We are encouraged to see that there is minimal customer overlap with Coyote’s business heavily focused on SMBs 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.”
SMBs are small- to medium-sized businesses that typically have fewer than 100 employees and less than $1 billion in annual revenue. Seidl said his estimates indicate that the deal is “immediately accretive” to EBITDA, or earnings before interest, taxes, depreciation and amortization, and EPS, or earnings per share, even with debt and equity issuance. RXO said it will pay for the deal on a cash-free, debt-free basis, using a mix of equity and debt that includes $300 million of committed equity from MFN Partners and $250 million of committed equity from Orbis Investments. RXO also said the deal could provide annualized cost synergies of at least $25 million.
UBS analyst Thomas Wadewitz said his firm hosted a private company brokerage and logistics forum in April where the general conclusion among brokers was that “scale matters and the big will continue to get bigger,” despite challenges for overlaying one large broker on top of another large broker. “Clearly the brokers believe in a longer term trend where scale and skill enable the large brokers to gain share and become an even larger part of the market,” he noted.
Put in the context of RXO’s deal to acquire Coyote, Wadewitz said the acquisition is a “significant strategic positive for RXO.” He noted potential integration risks in the areas of people and information technology, citing to the 2015 Echo-Command combination of brokers where integration was challenging in those two key categories.
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“Coyote is generally viewed as a good quality asset which has significant scale and a strong customer base. We believe there is value from scale in truck brokerage which enables a broker to have better visibility to the cost of capacity, access to more capacity and also a stronger relationship with large shippers,” Wadewitz said. “Strength in different customer verticals for RXO—industrial, retail—and Coyote—food, beverage, transportation—reduces risk of customer attrition.”
Wadewitz said the acquisition gives RXO “strong leverage to a potential upturn in the truckload and brokerage markets.” The analyst noted that the deal comes at what could be the end of a period of declining activity where the next stage is a transition to expansion.
United Parcel Service (UPS) acquired Coyote, a 3PL, in July 2015 for $1.8 billion. UPS is selling Coyote at a time when it was looking to cut costs as it focuses on its core parcel services. In January, UPS eliminated 12,000 positions , resulting in $1 billion in cost savings. And in March, the company unveiled a cost-cutting program dubbed Network of the Future that is expected to save $3 billion by the end of the 2028 fiscal year. The plan also calls for the closure of 200 facilities as UPS leans into automation across its logistics network.
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