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This story appears in the Jan. 13 print edition of Transport Topics.

XPO Logistics Inc. has agreed to purchase Pacer International Inc., the nation’s third-largest truck-rail intermodal freight operator, for $335 million in a deal that underscores the growing importance of that market segment.

XPO, based in Greenwich, Conn., said it would pay $9 per share for the Dublin, Ohio-based company, which specializes in moving container shipments for customers such as Procter & Gamble, Toyota and Wal-Mart. If the deal is approved, Pacer shareholders will receive $6 in cash and $3 in XPO stock.

The move brings XPO directly into the intermodal industry, where U.S.-based railroads moved a record 12.8 million shipments in 2013, eclipsing a high set in 2006. That result is built on annual growth of around 8% since 2011 in the domestic container market, where Pacer competes with larger rivals J.B. Hunt Transport Services Inc. and Hub Group Inc.

“We are buying Pacer primarily because we are infatuated with their intermodal business,” Bradley Jacobs, CEO of XPO, told Transport Topics on Jan. 6. “The combined company will be well-positioned to capitalize on these trends through its size and market relationships.”

The intermodal industry was widely expected to reach $15 billion in annual rail revenue for all of 2013, accounting for 47% of all rail shipments last year, industry reports show.

Intermodal accounted for about 80% of Pacer’s revenue over three quarters of 2013, totaling $558 million. The company’s profit margin from that business is 14% of revenue.

Hunt’s $2.54 billion over that period is the top intermodal revenue, with a 13% margin, followed by Hub at $1.91 billion, with an 11% margin.

The purchase would be the 11th for XPO in the past 20 months, doubling its annual revenue pace to about $2 billion, according to analysts.

XPO ranks No. 45 on Transport Topics Top 50 list of the largest North American logistics companies. When Pacer’s net revenue is added, the combined company would move up to No. 40.

Pacer is XPO’s second-largest acquisition by price paid and largest by revenue of the seller. Before last week’s announcement, XPO was on track to generate about $1 billion in revenue this year after multiple acquisitions — including 3PD, a home-delivery business bought for $365 million in July.

Pacer nearly tripled net income to $6 million, or 17 cents per share, from $2.1 million, or 6 cents in the first three quarters of the year. In November, the company projected 2014 results on an earnings-per-share basis would improve another 35% over last year’s total.

“Recent XPO deals have added more defensible service offerings to the company’s portfolio of services,” John Larkin, a Stifel Nicolaus analyst, said in a Jan. 6 report that cited Pacer and 3PD. “The company has wisely, in our view, de-emphasized growth in the less-defensible truck brokerage market, which in recent years has become more commoditized.”

The analyst described the latest move as a “crafty change in strategic course which should more easily allow for the achievement of the company’s long-term financial objectives.”

Jacobs told TT that other reasons for the move were Pacer’s status as the largest participant in the U.S.-Mexico freight market that is growing faster than domestic intermodal, as well as the potential for what he termed “substantial cross-selling opportunities on a companywide basis.”

Mexico is becoming more attractive because the combined cost of labor and shipping for products made in Mexico has become competitive with Asian factories, leading to more manufacturing and cross-border freight.

Pacer’s performance has re-bounded after an earnings decline from 2010 to 2011 and a loss in 2009.

However, Pacer’s logistics unit that does international freight forwarding, warehousing and truck brokerage lost $7.3 million, before interest and taxes, in three quarters of 2013.

Jacobs also said the company would review the performance of Pacer’s logistics business as XPO decides how to proceed with that unit.

Larkin said Pacer’s current management stabilized the company. ��Pacer CEO Daniel Avramovich will continue in that role, heading a new XPO unit.

XPO intends to broaden the intermodal market by selling truck-rail service to smaller shippers that previously haven’t been targeted by Pacer, Jacobs said.

The number of XPO shares that would be given to Pacer holders will be tied to XPO’s share price just before the date of sale completion, last week’s announcement said.

Approval by Pacer shareholders also is required.

The offering price is about 8% above Pacer’s Jan. 3 closing price. XPO also said it has received a $325 million commitment for financing from banker Credit Suisse.

The combined company’s operations would include 124 locations and 3,200 employees.

Jacobs cautioned that buying Pacer wasn’t a sign that XPO was losing interest in its mainstay truck brokerage business.

“We are sticking to the original plan,” he told TT. “We want to be a one-stop shop” for all types of logistics services.”

Jacobs entered the freight industry in 2011 by purchasing forwarding and brokerage operator Express1 Expedited Solutions. At the time, he targeted a $5 billion annual revenue business by 2017 based on brokerage.

Previously, he built United Rentals from scratch into a profitable $4 billion company.