XPO Logistics' (NYSE:XPO) upcoming spin-off has been a long time coming.
CEO Brad Jacobs first announced his intention to split up the company in January of last year. Back then, the plan was to sell off the parts of the business aside from the Less-Than-Truckload (LTL) unit.
The coronavirus pandemic scotched that idea, killing the market in M&A. At the end of 2020, XPO refined the plan to separate its logistics and transportation business in order to add shareholder value, as Jacobs has long believed that XPO trades at a "conglomerate discount" to its peers. As he sees it, some of the value of XPO is lost in the complexity of the business, in part because the company has no true peers on the market. The spin-off, which cleaves its contract logistics from its LTL and truck brokerage, solves this problem.
Here comes GXO
The spin-off company, called GXO Logistics, is set to become its own the entity in the third quarter, XPO just revealed. The news accompanied GXO's Form 10, formally introducing the company to investors much in the way an S-1 does with IPOs.
As an independent company, GXO will be the second-largest contract logistics company in the world, behind only DHL, which is privately held. Let's take a look at a few other key facts unveiled in the new filing.
- GXO generated $6.6 billion in revenue in the last four quarters, or 38% of XPO's total revenue.
- It has 210 million square feet of warehouse space, almost all of which is in North America and Europe.
- GXO is competing in an addressable market worth $130 billion, meaning it sill has plenty of room for growth with its trailing revenue representing just 5% of that market.
- The average customer has been with the company for 15 years, and it counts over 30% of the Fortune 100 as customers.
- Management expects organic revenue growth of 8% to 12% in 2022, and $700 million to $735 million in adjusted EBITDA, up 14% to 20% from its pro forma 2021 guidance.
Winner take all
In an interview, GXO's Chief Investment Officer Mark Manduca said he sees the contract logistics market becoming "winner take all," a bold statement for what's historically been a fragmented industry that's not usually thought of in the same way as, say, Google search.
As Manduca sees it, technology prowess and a global reach are key for competing in the logistics market, and GXO has an edge in both categories. The company has invested billions in robotics and automation over the years, and has a strong position in fast-growing areas of the logistics market like e-commerce and reverse logistics, meaning processing returns. In fact, the company has the largest outsourced e-commerce fulfillment platform in Europe and is a leader in North America as well.
Manduca's description of a winner-take-all market also implies that he sees consolidation ahead for the industry as the biggest players compete to gain scale, competitive advantages, technology, and other areas.
That a company like GXO even has a Chief Investment Officer, a position normally found in banks and investment funds, also seems to indicate that M&A will be a big part of the company's growth plan and overall strategy. XPO CEO Brad Jacobs, who will also serve as Chairman of GXO, has a reputation as a roll-up specialist, a strategy of growing through a series of acquisitions, which he successfully implemented both at XPO and earlier at United Rentals. Being able to use its equity to fund acquisitions was also one of the justifications for the separation of GXO and XPO.
The press release announcing Manduca's hiring says he'll be responsible for: "Analysis of GXO's growth opportunities, optimization of the company's asset portfolio and oversight of its UK pension investments."
With the filing of the Form 10 now complete, Manduca said that management still has to fill in a few other key leadership positions, and the company is also angling to gets its credit ratings from the rating agencies before it separates, aiming for an investment-grade rating to give it affordable access to capital.
With double-digit forecasts in revenue and EBITDA in 2022, GXO looks set to make a splash when it splits from XPO later this year. Investors should be able to get a piece of the contract logistics powerhouse by September at the latest.