Barely six months after it was spun off from XPO Logistics, GXO Logistics (GXO 0.53%) looks ready to make its first big mergers and acquisition (M&A) deal.
According to a press release last weekend, GXO, which is the largest pure-play contract logistics company in the world, agreed to a "possible offer" to acquire U.K-based Clipper Logistics (CLG) for the equivalent of 920 pence ($1.25) per share, or roughly $1.3 billion -- 690 pence in cash and the remainder in GXO stock. According to U.K. law, GXO had to announce that the deal was in negotiations after news broke in the media.
It's not surprising to see GXO pursue such a deal. M&A is in the company's genetics. It was spun off from XPO Logistics, which came to be one of the largest transportation companies in the U.S. through a roll-up strategy, acquiring smaller companies to gain scale. GXO chief investment officer Mark Manduca has also made references to the fragmented nature of the logistics industry, implying that there's an opportunity for consolidation and for GXO to take advantage of its size and technological prowess.
Investors had little reaction to the news as GXO stock was essentially unchanged on Tuesday, but the deal looks like a smart move because of the benefits to GXO from the combination. But before discussing the impact of a deal, let's step back and take a look at Clipper.
What is Clipper Logistics?
Clipper, listed on the London Stock Exchange, isn't familiar to most U.S. investors. The company was founded in 1992 with just a single driver, and has grown over time to generate close to $1 billion in annual revenue. Though its operations are primarily focused on the U.K., with 85% of revenue coming from its home country, the company has 55 facilities across Europe and nearly 12 million square feet of warehouse space.
Clipper has also been growing rapidly, with revenue up 33% in the first half of its fiscal 2022, which ended Oct. 31, 2021. Growth in e-commerce and reverse logistics -- handling returns for e-commerce, for example -- has been particularly strong. Both e-commerce and reverse logistics have been focal points for GXO. In its most recent fiscal year, 69% of Clipper's revenue came from e-commerce and reverse logistics, an attractive feature for GXO, which reported 45% e-commerce growth and 28% reverse logistics growth in its own fourth-quarter report.
Clipper has a solid track record of profitability and cash generation with 77.3 million pounds ($105 million) in free cash flow last year, equal to an 11% free-cash-flow margin. Manduca, GXO's chief investment officer, said in an interview with The Motley Fool that its margins were one of the elements that attracted GXO, and he noted its strong return on invested capital of more than 30%.
Finally, Clipper has a wide range of customers, including major U.K. companies like ASOS, British American Tobacco, and Marks & Spencer, and French company L'Oreal.
How it fits with GXO
Due to the ongoing nature of the transaction, GXO could not be specific on how much in synergy costs it hopes to achieve. But the company sees a number of benefits, including cost savings in procurement and operations, and there are important complementary aspects between the two companies' customer bases geographically and in industry verticals.
Clipper will give GXO a horde of new customers in e-commerce and reverse logistics, which are key growth markets for GXO and ones where it's invested significantly in technology like collaborative robots.
Clipper's individual customers have little overlap with GXO's but share the same geographies, which will help drive synergies and growth. Clipper's focus on the U.K., which is now GXO's biggest country by revenue, will help accelerate GXO's growth in one of the world's most penetrated e-commerce markets. And Clipper has a presence in Germany, Poland, and the Netherlands, three countries that GXO has been eager to expand its presence in.
As far as industry verticals, Clipper is also strong in life sciences, which generally refers to pharmaceuticals and biotech, giving GXO a presence in a valuable industry that it has been looking to build its position in. One of Clipper's biggest customers is the U.K.'s National Health Services.
Manduca explained that there are often regulatory hurdles to providing logistics in the life sciences industry and that it requires "high intellectual acumen" to get into. Since the life sciences industry represents trillions of dollars in market cap, unlocking that opportunity could help GXO tap a significant new market.
It's unclear when the deal might close, but the likelihood that it will go forward seems high as insiders representing 23% of the share ownership have already irrevocably voted in favor of the deal.
No acquisition is without risks, but given GXO's track record, Clipper's own strong performance, and the complementary aspects between the two companies, the merger is likely to be a success.