GXO Logistics (GXO -0.06%) was created in 2021 in a spinoff from XPO with a simple value proposition for investors. The company would be the largest pure-play contract logistics company and would use its size and scale to grow in a fragmented industry through acquisitions, new technology, and organic growth.
Thus far, the company has kept that promise, delivering solid organic growth and making its first acquisition last year, taking over Clipper Logistics, a U.K.-based company known for its prowess in reverse logistics (processing returns).
Now, GXO has made another promising deal. It recently announced it was buying PFSweb for $181 million, or an enterprise value of $142 million, which includes the company's cash balance of $39 million. The deal is expected to close in the fourth quarter.
A robot in a GXO warehouse. Image source: GXO Logistics.
What is PFSweb?
PFSweb is an e-commerce fulfillment platform. GXO will pay $7.50 a share to acquire it. PFSweb shares jumped 48% on the day the deal was announced (September 13th), indicating a high degree of confidence that the deal will go through.
PFSweb specializes in fulfilling orders for luxury goods, catering to the health and beauty, jewelry, and fashion and apparel industries, all areas where GXO is not well represented and sees a growth opportunity. Among its top customers are L'Oreal, Hanesbrands' Champion, and Shiseido.
In 2022, PFSweb's revenue rose 6.4% to $295.1 million, with an operating loss of $20 million on the basis of generally accepted accounting principles (GAAP). However, its PFS Operations' adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $23.2 million.
What PFS brings to GXO
For GXO, PFS will introduce new capabilities and improve others, allowing it to cross-sell those features to its existing customers.
In a recent conversation with GXO chief financial officer Baris Oran, he said PFS would enhance the company's high-end unboxing experience (the unpacking and demonstration of consumer products, especially tech gadgets, shared on web videos) for some of its customers. It will also bring new capabilities including payment and fraud protection, and customer care.
In addition, the acquisition will help with order orchestration -- i.e., managing the range of tasks associated with fulfilling customer orders such as order processing, inventory management, payment processing, and shipping and fulfillment.
With the acquisition, GXO seems to be taking a step closer to the end customer and is expanding its range of outsourcing capabilities for retailers and e-commerce companies that already turn to the logistics company for things like automated fulfillment and returns processing.
Oran also said that GXO is a good fit for PFS since the latter was running out of resources, so the deal will help the order fulfillment specialist grow faster, benefiting from GXO's own capabilities and assets. PFS' operations and commercial teams will join GXO and continue to run their business.
Eduardo Pelleissone, GXO president of Americas and Asia-Pacific, said, "We'll benefit by adding to our customer portfolio in short-cycle, high-volume product categories, leveraging PFSweb's client relationships, and capitalizing on their services to expand our suite of capabilities."
What's next for GXO?
GXO is paying all cash for PFSweb, but it should not significantly affect its ability to make future acquisitions because Oran said its debt/EBITDA leverage ratio would still be below 2.
The company continues to focus on paying down debt to position itself for other acquisitions. And Oran sees the PFS deal as value-accretive for GXO, saying that PFS company is targeting $21 million in EBITDA this year, meaning its enterprise value is roughly eight times forward EBITDA. That would put its valuation at a discount to GXO, which currently trades at an EV/EBITDA of 13.
While conditions remain challenging in the transportation and logistics industry, acquiring a company with PFS' reputation for high-quality customer experiences, complementary strengths in areas like fraud protection, and its positioning in valuable customer verticals makes sense for GXO, as Oran explained.
The long-term opportunity continues to look appealing for GXO as it benefits from tailwinds like automation and outsourcing and finds strategic acquisitions like PFS. The stock should continue to move higher as the company gains market share and grows profits.
