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GXO Logistics poised to embark on M&A hunt

Contract logistics provider GXO Logistics Inc. is ramping up a mergers and acquisitions program that will focus on North America and continental Europe, the company’s CFO said Thursday.

In a phone interview with FreightWaves, Baris Orem said M&A activities will be geographically focused and zero in on smaller contract logistics competitors that lack the scale and technology to meet the growing demands of its customer base, Orem said.

Germany, Europe’s largest market, is a strong focus of future M&A activity, Orem said. About 90% of its business comes from five countries: the United States, the United Kingdom, France, the Netherlands and Spain.

GXO (NYSE: GXO), the world’s largest pure-play contract logistics provider, does not need to acquire companies for the purposes of building scale, Orem said. “We already have the scale,” he said.

GXO generates about 70% of its revenue from the U.S. and the U.K., and more than half from the e-commerce, omnichannel retail and consumer technology segment. It has a lesser presence in food and beverage, industrial manufacturing and consumer packaged goods sectors.

GXO is looking to penetrate the North American pharmaceutical and life sciences logistics markets where its exposure is currently limited, Orem said.

GXO, which was spun off last summer by transport provider XPO Logistics Inc. (NYSE: XPO), in late February announced that it had acquired U.K.-based Clipper Logistics LLC for $1.3 billion in cash and stock. Clipper generates about 80% of its revenue from the U.K. market, with the balance coming from Germany and Poland.

Clipper also has a solid niche in product returns and refurbishment, a segment into which GXO plans to expand.

The two companies have very little customer overlap, Orem said. However, there are significant duplicative costs that can be rationalized once the deal closes later this year, he said.

Brad Jacobs, XPO’s founder, chairman and CEO, also serves as nonexecutive chairman of GXO. Jacobs and the GXO board are consulted on strategic initiatives, but GXO’s business, including M&A efforts, is run by GXO executives, Orem said.

Jacobs built XPO on the back of 17 acquisitions in four years. He stopped M&A in 2015 and has no plans to resume it. XPO recently sold its intermodal and drayage businesses and plans to spin off or list on the public market all of XPO’s remaining assets except for its North American LTL business.

Orem’s comments come the day after GXO reported better-than-expected first-quarter results late Wednesday and raised its full-year revenue and income guidance. The company reported 59 cents per share in adjusted diluted earnings, above consensus estimates of 50 to 52 cents per share and well above the 37 cents per share in the 2021 quarter, when it was still part of XPO. Adjusted net income hit $68 million, up from $42 million in the year-earlier quarter. Revenue rose 14% to just under $2.1 billion.

For the year, GXO said it expects adjusted diluted earnings per share to fall within a range of $2.70 to $2.90. The guidance translates into EPS growth of between 29% and 39%, GXO said. Revenue will grow by 11% to 15%, up from the prior range of 8% to 12%, the company said.

GXO executives said the company is experiencing strong demand across all its verticals, with particular strength coming from first-time outsourcing from e-commerce and omnichannel retail customers. Though more commerce is being conducted in store as pandemic-related fears abate, executives said they expect demand to remain strong from businesses that want to conduct business directly and online with customers.

GXO, whose long-term customer contacts afford it multiyear visibility, doesn’t see any demand slowdown on the horizon. It has little trouble recruiting workers, and cost-inflation pass-throughs rarely merit conversations with customers. “It’s never a big discussion,” CEO Malcolm Wilson told analysts on Thursday. “We don’t have big dramas about pass-throughs.”

GXO is banking on more business as companies turn over increasingly complex and demanding inventory-management functions to outside specialists. Inflation may also not be much of an issue with multinational customers because contract warehousing, unlike transportation, represents a small part of a company’s cost of goods sold.

The FREIGHTWAVES TOP 500 For-Hire Carriers list includes XPO Logistics (No. 8).