QXO's Creation of New Shares Pays Back the Investors That Helped Make its Kodiak Purchase Possible

QXO logo with Chairman and CEO Brad Jacobs

"I like running publicly traded companies," QXO Chairman and CEO Brad Jacobs writes in How to Make a Few More Billion Dollars. "Being public makes it easier to build something big and lasting, at least for me. It gives me deep access to capital markets on non-onerous terms." His latest financial move shows how.

On April 1--the same day it completed its acquisition of Kodiak Building Partners--QXO filed with the Securities and Exchange Commission to create a new Series C Convertible Perpetual Preferred Stock. The shares are meant to be owned by Apollo Global Management, affiliates, Temasek, and some other investors who together invested $3 billion in QXO so that it could make deals like the $2.25 billion purchase of Kodiak.

Unlike common stock holders, the holders of Series C shares will get a quarterly dividend equal to a 4.75% annual payout. The Series C shares are priced at $10,000 apiece, so when shareholder votes are required, the holder of each share will get a number of votes equal to $10,000 divided by the initial conversion price of $23.25 per share--that's roughly 430 common stock votes per Series C share. Total Series C shareholders are barred from owning more than 20% of all shares outstanding.

Issuing special series of shares is common on some parts of Wall Street but not in construction supply. For public companies, issuing preferred stock with benefits sits in the middle ground between incurring debt (through bank loans, lines of credit, or corporate bonds) and issuing more stock.

In his book, Jacobs writes that he generally doesn't want to dilute his stock price by issuing more shares, but he's OK with it "if the new capital is deployed strategically to buy something that drives higher profits per share." Presumably, buying Kodiak fits that bill.

Ironically, Jacobs advises against using private equity funds. "As a group, they're entrepreneurial but can be fair-weather friends, and their focus on self-interest can favor aggressive decision-making." But Jacobs' relationship with Apollo dates back 27 years, when was was then Chase Capital Partners invested in his United Rentals business. Apollo introduced his company to a lot of important people, provided market intelligence, and gave good advice, he wrote.