XPO logistics spin-off GXO sees ‘massive scope for organic growth and M&A’

The spin-off of XPO’s logistics division into GXO, planned for the third-quarter (Q3) of this year, will focus on the “massive scope” for organic growth as well as merger and acquisition (M&A)-based expansion, according to a senior company executive.

The pitch to potential investors is that GXO will have an annual revenue over US$7 billion – roughly two-thirds of it generated in Europe and one-third in the US – operate almost 900 warehouses, offering over 200 million sq ft (19 million sqm) of storage space and be well-positioned to continue to benefit from the rapid growth in e-commerce and reverse logistics, customer demand for warehouse automation, and the secular trend toward outsourcing.

“We are the world’s number 2-ranked contract logistics firm (behind DHL Supply Chain) but only have a 5% share of a US$130 billion outsourced logistics market in North America and Europe,” GXO’s newly appointed chief investment officer, Mark Manduca, told Lloyd’s Loading List in an interview. “There is massive scope for both organic growth and M&A.

Deep pool of potential new business

“As far as organic growth drivers are concerned, there’s certainly no evidence to suggest anything other than an increasing number of supply chains being outsourced that were previously handled in-house, especially as they have become far more complex and expectations of speed and precision are rising. A deep pool of potential new business exists for GXO, both through share gain and penetration,” he underlined.

One of the major contributors to organic growth in XPO’s logistics segment in recent years has been e-commerce. And the company claims to have the largest outsourced e-commerce fulfilment platform in Europe and to operate a leading e-commerce and reverse logistics platform in North America.

“If you look at how our revenue is split, at our organic growth drivers, at our strategic focus on key verticals, our know-how in e-commerce is exemplified,” Manduca stressed. “E-commerce, omnichannel, retail now make up 40% of our sales line. Then you’ve got food and beverage, which is around 13%, consumer packaged goods (13%), consumer technology (11%). 

“And what reeling off these numbers reveals is that over three-quarters of our revenue line is not industrial-exposed, it’s consumer-exposed. We concentrate on a high-growth, non-cyclical, e-commerce-centric business, bringing resilience to our business model in turbulent times.

“We are going into the right verticals in the right locations. In terms of the spin-off, we’d like to think it adds up to a desirable investment proposition.”

Turning to M&A, Manduca played down suggestions that GXO lacked scale in regions such as Asia and the Middle East – its footprint being primarily centred on Europe and North America.

“As the world’s second-ranked contract logistics operator, our global scale is one of our biggest strengths,” he insisted. “We continue to partner with blue-chip brands in robust, long-term contracts and relationships and provide supply chain solutions that are increasingly global in reach.”

He continued: “We’ve got a track record in executing successful M&A, and it’s been country-agnostic. In a very fragmented industry; you’ve got many smaller players potentially moving in and out of profitability in the industry, and consolidation is the likely outcome. If good deals come our way at reasonable prices that add value for shareholders, we’ll be open to them.

“But there are some phenomenal, organic growth opportunities out there – not least in e-commerce, where we are committed to capitalising on our strengths – and that’s what we’re going to be focusing on first and foremost at GXO.”

Good shape heading into spin-off

At a Q1 conference call with analysts last month, XPO Logistics chairman and CEO Brad Jacobs revealed that the company had recently won the largest contract in the history of its North American logistics business. At $1.8 billion of projected revenue through 2032, this includes both an extension and an expansion with a longstanding customer.

Other recent contract wins include “three major brands (Apple and UK retailers ASOS and Waitrose) that, in total, will be using over $1 billion of our logistics services over the next five years,” Jacobs said.

Malcolm Wilson, currently CEO of XPO Logistics Europe and appointed to head up GXO, said these wins were “a good balance between established customers seeking longer-term contracts and new first-time customers like Apple.

“We’ll open a massive distribution centre (for Apple) in (the US state of) Indiana with over 1 million square feet of state-of-the-art space for e-commerce fulfilment,” Wilson added. “It will be direct-to-consumer distribution that uses advanced automation to accelerate deliveries and robots to personalize products before we ship them to consumers.

 “All in all, year-to-date, we are executing on customer agreements with a combined value of more than $4 billion on the contract life. These agreements also give us great visibility into future revenue and margin performance in our logistics business, which is planned to be spun off as GXO.”

Positive outlook

XPO recently issued full year preliminary 2022 guidance for GXO, assuming a 2021 separation with organic revenue growth of 8% to 12% above pro forma 2021 and adjusted EBITDA of $700 million to $735 million, reflecting year-over-year growth of 14% to 20% above pro forma 2021.