GXO’s potential acquisition of Wincanton credit negative in near term

GXO Logistics, Inc’s ratings of ‘BBB’/Outlook Stable are susceptible to a negative rating action if the acquisition of Wincanton plc is completed under the currently assumed terms, according to Fitch Ratings. Fitch believes a revision of the Rating Outlook to Negative from Stable would be the most likely outcome.

Fitch’s view considers management’s seeming post-Clipper strategic and capital allocation shift away from gross debt reduction over the near term towards another sizeable and largely debt-funded acquisition. Fitch currently forecasts EBITDA leverage will rise to the mid-to-high 2.0x on a pro forma basis, requiring significant management commitment to deleveraging in order to improve EBITDA leverage to Fitch’s 2.0x negative rating threshold. However, the consistency and scale of GXO’s FCF profile would provide the capacity to deleverage on a gross debt basis, should the company prioritize it.

Financial and Capital Deployment Policies are Key: Management’s dedication to deleveraging and managing run-rate EBITDA and EBITDAR leverage at 2.0x and 3.3x, respectively, will be key to maintaining GXO’s ‘BBB’ ratings. It is Fitch’s current view that the size and timing of the Clipper and potential Wincanton acquisitions are most likely coincidental and that the availability of other similarly sized transactions moderates the likelihood that this scale and pace of transactions will continue through the medium term. Fitch currently expects GXO will prioritize deleveraging within the next 18-24 months following a potential transaction close, similar to its actions following the acquisition of Clipper in 2022. This approach supported EBITDA leverage and EBITDAR leverage of 2.1x and 3.1x, respectively, at YE 2023.

Wincanton Supports New Verticals: The addition of Wincanton would modestly strengthen GXO’s business profile, adding a footprint in new verticals within the U.K. market. The similarity in operations and contract structures, which are largely on a cost-plus basis, are supportive of fairly low integration risks. The new platform is also supportive of GXO leveraging Wincanton’s reputation to further expand in these target markets.

Solid Performance Despite 2023 Downcycle: Fitch expects GXO to continue to demonstrate a strong secular growth profile, benefitting from trends in outsourcing warehouse and supply chain services. The company’s reputation for service, operating efficiency supporting customer cost savings, and global scale are supportive of its growth prospects. Fitch projects organic revenue growth in the mid-single digits in 2024 and that growth will remain in the mid-to-high single digits over the medium term.

Fitch believes GXO’s operating performance in 2023 demonstrates its cyclical durability, considering the wide-spread inventory de-stocking trends that negatively affected much of the logistics and transportation markets in 2023. Operating performance in 2023 reflected continual new business wins, moderately lower volumes at customers’ sites, and the highly contractual nature of customer relationships. This supported steady EBITDA margins at about 7.5%, which was nearly flat from 2022 levels.

Rating Considerations: GXO's ratings reflect its highly contracted and growing FCF profile due to solid relationships with customers, strong secular growth tailwinds driving high-single digit revenue growth over the medium term, and a strong market position supported by large scale and technology integration. Fitch expects capital allocation priorities to be focused on post-acquisition debt reduction in the near term and growth and bolt-on M&A longer term.