News

Freight brokerage RXO (NYSE: RXO) has agreed to buy the Coyote Logistics business of United Parcel Service (NYSE: UPS) for $1.025 billion, a deal that would significantly boost its scale and market share. Investors are going along for the ride, sending RXO shares up more than 20% as of 11:15 a.m. ET.

Building scale

UPS bought Coyote in 2015 for $1.8 billion as a way to expand its industrial freight operations, but the unit has never lived comfortably inside the shipping giant. In January, UPS said it was weighing the sale of Coyote to focus on less cyclical aspects of the transportation business.

RXO, which was spun out of trucking company XPO in November 2022, is focused on brokerage, or connecting customers in need of shipping services to shippers. The deal would make RXO the third-largest U.S. broker, adding about 15,000 customers to its existing 4,000 and pushing RXO deeper into verticals including food and beverage.

The company also has a contract to provide brokered transportation services to UPS through January 2030.

"RXO's highly accretive acquisition of Coyote will immediately increase the scale of our brokerage business, providing customers with more capacity across a wider array of power lanes," CEO Drew Wilkerson said in a statement. "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%."

Is RXO stock a buy?

RXO is buying $3.2 billion in 2023 revenue and $86 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) at close to the bottom of the shipping cycle. UPS is a motivated seller and understandably wants to focus on its core operations, but it appears RXO is getting a good deal.

Brokerage is a relationship business, and scale is vital to success. The purchase should help RXO establish itself with large shippers and transport providers. It also highlights what a fragmented market brokerage is and suggests there could be further opportunities for consolidation.

The market could be getting ahead of itself with RXO's dramatic move on Monday, but this is a stock that still has a lot of open highway from here.

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Lou Whiteman has positions in RXO and XPO. The Motley Fool has positions in and recommends RXO. The Motley Fool recommends United Parcel Service and XPO. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.