RXO, Inc. (NYSE: RXO) shares are trading higher after the company inked a definitive agreement to acquire Coyote Logistics from United Parcel Service, Inc. (NYSE: UPS) for $1.025 billion in cash.
As per the terms, the transaction disclosed on Sunday will be financed through a combination of equity and debt, including a $300 million equity investment from MFN Partners and a $250 million equity investment from Orbis Investments, both significant shareholders of RXO.
RXO will maintain its role in fulfilling UPS's brokered transportation requirements under an existing contract valid until January 2030.
This acquisition is expected to bolster RXO's market standing, broaden its customer base, and expand its network of carriers.
RXO's Board of Directors has unanimously approved the transaction, which is expected to be finalized by the end of 2024 subject to customary closing conditions and regulatory approvals.
Upon deal closure, RXO is set to become the third-largest provider of brokered transportation services in North America.
The transaction is anticipated to immediately and substantially enhance RXO's adjusted EPS and adjusted free cash flow.
In 2023, the acquired business generated around $3.2 billion in revenue, with around $470 million in gross margin and about $86 million in adjusted EBITDA.
Outlook: RXO maintains its outlook for the second quarter adjusted EBITDA of $24 million to $30 million.
RXO anticipates achieving annualized cost synergies of at least $25 million from the buyout.
Drew Wilkerson, chief executive officer of RXO said, "RXO will realize significant synergies from the acquisition by quickly integrating Coyote's business into RXO and leveraging our cutting-edge technology. The addition of Coyote's customer base will diversify RXO's vertical mix and will increase the number of customers that do more than $1 million in business with us by approximately 80%."
UPS Chief Executive Officer Carol B. Tomé commented, "As UPS positions itself to become the premium small package provider and logistics partner in the world, the decision to sell our Coyote Logistics business allows an even greater focus on our core business."
Upon completion of the transaction, UPS plans to update its financial outlook.
As of March 31, 2024, RXO's cash and cash equivalents stood at $7 million.
Investors can gain exposure to RXO via Motley Fool Small-Cap Growth ETF (NYSE: TMFS).
Price Action: RXO shares are up 13.8% at $23.00 premarket at the last check Monday.