STG Logistics made a big bet on the market for transloading freight last month, acquiring XPO Logistics’ intermodal unit in a $710 million cash transaction. However, the headlines from the day were framed mostly from XPO’s perspective as that company executes a breakup strategy focused on increasing shareholder value.
But what the deal provides STG should not be overlooked.
Vertical integration eliminates capacity concerns
Chicago-based STG is a containerized logistics provider offering services like drayage, transloading and warehousing as well as intermodal and truck transportation. It has amassed North America’s largest independent network of container freight service facilities, along with extensive contract logistics capabilities, through acquisition.
One of the main sticking points for STG and other providers during the pandemic has been a reliance on third parties for drayage and intermodal capacity.
However, with the acquisition of XPO’s (NYSE: XPO) intermodal business — 48 locations, 11,000 containers, 2,200 tractors (owner-operators) and 5,200 chassis — STG is vertically integrated. It now has an in-house port-to-door logistics offering for containerized goods, capable of taking a container from the ports or a customer terminal to final destination.
“We’ve always been constrained on how much allocation we got with our primary providers on the railroads,” STG CEO Paul Svindland told FreightWaves. “So we were holding back on our ability to accommodate our customers because we just didn’t have enough rail capacity.”
Svindland was the chief operating officer at Pacer International, which was acquired by XPO in 2014. Pacer along with the acquisition of Bridge Terminal Transport in 2015 were the foundation for XPO’s intermodal unit.
He said a lack of rail capacity throughout the pandemic has forced more containers to move over the road than in the past. The deal with XPO, consummated at 10x 2021 earnings before interest, taxes, depreciation and amortization, brings on capacity through contracts with Union Pacific (NYSE: UNP) and CSX (NASDAQ: CSX).
“[The acquisition] basically eliminated all of that,” Svindland continued. “We are now 100% vertically integrated. So we control our own destiny, which again as it relates to both the drayage and the intermodal rail side — we thought that was just a very, very powerful thing to go do.”
The combined entity is expected to equal $1.7 billion in revenue during 2022, approximately $1.2 billion of which will be generated by XPO. STG consolidates roughly 275,000 twenty-foot equivalent units annually through its transloading operations, utilizing a fleet of 53-foot containers. Future expectations call for volume growth of another 100,000 TEUs annually within a few years.
“There’s just a tremendous amount of transload opportunities out there on the horizon,” Svindland said. “The reason we feel so confident is you just have kind of a perfect storm of a situation.”
Ocean carriers don’t want their boxes moving inland. They want them returned quickly to origination ports to capture high headhaul rates. Also, the railroads would rather move 53-foot containers versus international boxes (20- and 40-foot units).
“Two 40-footers kill the same space on a double stack as two 53s. So by simple math, that’s 30% less efficient,” Svindland said. “It fits beautifully to do transload.”
STG’s less-than-container-load service runs like a less-than-truckload operation with containers coming in, being sorted and rerouted to one of 85 destination points. The loads are handled through a proprietary cargo management system (acquired through a prior acquisition), which has become the industry standard for many users.
“We by definition are a highly sophisticated transload provider,” Svindland said. “That’s our core business. We have the technology. … We have the warehouse facilities and we have the labor and the knowledge know-how. And now we have the capacity because we acquired XPO intermodal.”
Svindland sees ample transload opportunities throughout the U.S. He called specific attention to prospects at the ports in the Northwest; Houston; Savannah, Georgia; and Florida. He said the late-2021 acquisition of International Warehouse Services, a warehousing, trucking and distribution services provider in Port Everglades, Florida, is a “hidden gem.” He believes the location is capable of competing with ports in Savannah and Charleston, South Carolina, utilizing the Florida East Coast Railway.
All in, the company has 28 port locations with over 5 million square feet of space. Final-mile transportation is provided through a network of more than 65 inland partners. Svindland said STG needs to make a “little bit of investment” in a facility in Norfolk, Virginia, but once completed, it will have transload capabilities in every major port in the U.S.
Congestion eases somewhat, lot of noise in the comp
Svindland said he’s “seeing things improve subtly” with regard to port congestion.
Like the broader market, STG has seen an influx of freight on the East Coast with volumes softer on the West Coast. The decline in the west is tied to a number of items, including COVID lockdowns in China as well as some shippers steering clear of the ports ahead of negotiations between labor and port operators. Svindland said the effects from Lunar New Year and the Winter Olympics are still an overhang on the West Coast as well.
He believes the inventory strategy for manufacturers and retailers going forward is “just-in-case” and “near-storing,” meaning more merchandise will be stored closer to the end consumer.
“I believe that customers want to keep the inventory levels much closer to home than they were in the past,” Svindland said. “That’s part of the reason you’re going to see inventory at inflated levels. Inventory levels are going to [be] far greater than they were before, just because people don’t want to not have stuff on the shelves.”
Acquisitions take a back seat momentarily
STG was acquired by private equity firm Wind Point Partners in 2016. As a portfolio company, it made 10 acquisitions, quadrupling in size. Its acquisition of XPO occurred in conjunction with a recapitalization, which brought on a new financial partner, Oaktree Capital Management. The two investors are now equal partners in STG.
“We’re never going to turn off the M&A spigot, but for the next year we are laser-focused on integration,” Svindland said. In addition to some equipment from the XPO deal being integrated into STG’s asset-light structure, roughly 700 employees have been added as well.
STG’s model requires minimal capital investment annually and generates a significant amount of free cash flow. Its cash-generation capabilities and financial backing from partners provide it with ample powder for future transactions.
“Ultimately we will turn the M&A spigot back on,” Svindland said. Future targets include intermodal marketing companies without assets and deals on the container freight services side of the business in Canada and Mexico.
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