UPDATE 3-XPO Logistics to buy Pacer to tap booming US-Mexico trade

Mon Jan 6, 2014 11:50am EST

* Deal for $335 mln, or $9/shr - a premium of 8 pct

* XPO to become 3rd-largest N. American intermodal shipper

* XPO and Pacer shares rise 7 pct (Adds CEO quote, analyst comment; updates shares)

By Sagarika Jaisinghani

Jan 6 (Reuters) - XPO Logistics Inc will buy Pacer International Inc to bolster its intermodal shipping business as it looks to provide cheaper services and take advantage of the booming trade between the United States and Mexico.

XPO's shares rose as much as 10 percent after the company said its eleventh deal in two years would make it the third-largest North American provider of intermodal services, which move goods using multiple modes of transport.

U.S. transportation companies have invested heavily to build up their intermodal business, which cuts fuel costs by 15-20 percent by moving goods in standardized containers using trucks, trains and ships.

These companies have also focused on expanding their services to Mexico, where the booming manufacturing sector has made imports cheaper compared with China and other countries, a trend XPO Chief Executive Brad Jacobs expects will continue.

"There's about 2.8 million trucks a year that move between Mexico and the United States so there's a large potential universe for conversion to rail from trucks," Jacobs told Reuters on Monday.

It is cheaper to move goods such as chemicals and automobiles by rail rather than trucks as the transportation industry faces a shortage of drivers, while new rules restricting driving hours have led to higher wage costs.

ONE-STOP SHOP

The $335 million deal to buy Dublin, Ohio-based Pacer, the largest provider of intermodal services between the U.S. and Mexico, would give XPO access to about 16,000 containers.

"This is a play for us to get into intermodal in a big way and to also benefit from Pacer's leading position in cross-border Mexico," Jacobs said.

XPO bought six companies last year as it aims to become a one-stop shop in logistics, offering services such as truckload, less-than-truckload, quick delivery, freight forwarding as well as intermodal.

"By moving into the last mile delivery market, the transportation management systems arena, and now the intermodal market, the company has wisely de-emphasized growth in the less defensible truck brokerage market," Stifel Nicolaus & Co analyst John Larkin wrote in a note.

In August, XPO bought "last mile delivery" services provider 3PD Holding - which delivers goods from retailers to customers. In December, it agreed to buy NLM, the largest web-based quick delivery services provider in North America.

XPO on Monday said it expected the deal to more than double total annual revenue to about $2 billion and immediately add to earnings.

XPO currently gets about $20 million a year, or about 3 percent of expected 2013 revenue, from its intermodal business.

The same business accounted for more than 80 percent of Pacer's revenue of $1 billion in the trailing 12 months ended Nov. 30.

DEAL DETAILS

XPO's offer of $9 per share -- $6 in cash and the rest in stock -- represents a premium of 8 percent to Pacer's Friday close of $8.33.

Pacer's shares were trading up 7 percent at $8.95 in late morning trading on the Nasdaq. XPO was also up 7 percent at $30 on the New York Stock Exchange.

The deal, expected to close in the second quarter this year, has a break-up fee of $12.4 million, XPO said in a conference call with analysts.

Greenwich, Connecticut-based XPO said it would partly finance the purchase with a loan from Credit Suisse AG.

Credit Suisse Securities (USA) LLC is financial adviser to XPO, and Wachtell, Lipton, Rosen & Katz is legal adviser.

Morgan Stanley & Co LLC is serving as financial adviser to Pacer, and Winston & Strawn LLP is acting as legal adviser. (Additional reporting by Sruthi Ramakrishnan in Bangalore; Editing by Supriya Kurane and Savio D'Souza)