Why C.H Robinson Stock Was Tumbling Today
Key Points
C.H. Robinson is buying RXO for $5.8 billion in a cash-and-stock deal.
Management expects $300 million in annual synergies and sees the deal being accretive to earnings in less than a year.
Investors would rather the company avoid more debt and spend the cash on share buybacks.
Shares of C.H. Robinson (NASDAQ:CHRW) were taking a dive today after North America's largest freight brokerage said it would acquire RXO (NYSE:RXO) in a stock-and-cash transaction for $5.8 billion, including debt.
However, investors gave the deal a clear thumbs-down, showing they either thought Robinson was overpaying for RXO or they didn't like the acquisition at any price.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »
As of 1:37 p.m. ET, C.H. Robinson stock was down 12.7% on the news, while RXO had gained 21.9%.
Image source: Getty Images.
What the deal means for C.H. Robinson
Robinson said the merger would lead to $300 million in net run rate cost synergies within two years of the closing, and sees the strategic justification as increasing the company's network density and penetration across industry verticals.
C.H. Robinson CEO Dave Bozeman said, "This transaction is a natural next step in our transformation, allowing us to create a more scaled, resilient North American third-party logistics provider positioned to offer exceptional customer service and redefine the future of our industry."
Robinson will pay for the deal with 57% cash and 43% stock, and plans to finance the cash portion with new debt, implying about $3 billion in new debt. The company currently has $1.69 billion in debt.
Why C.H. Robinson investors didn't like the news
Though Robinson said it expected the transaction to be accretive to adjusted earnings per share within nine months of the close, investors instead seemed to focus on the new debt, the impact on its leverage ratio, and that the company intends to pause share repurchases until it reaches a leverage ratio of 1.75x-2.25x adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
C.H. Robinson management seems to be betting on the long term and that its Lean AI operating model can make the deal successful.
The sell-off could be an attractive buying opportunity, but I'd like to see clear signs that the deal can clear regulatory hurdles first.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends C.H. Robinson Worldwide. The Motley Fool recommends RXO. The Motley Fool has a disclosure policy.