XPO’s decision to acquire a significant portion of Kuehne + Nagel’s UK contract logistics operations raises important questions about the shape of the UK market as well as what motivations lie behind the deal. As Ti reported, the scope of the transaction includes the Swiss group’s operations across drinks logistics, food services and retail & technology businesses. In 2019, the operations combined revenue topped CHF750m (€674m).
Both K+N and XPO have grown their operations in the UK market primarily through acquisitions over the past two decades. XPO’s growth story is well-known, with the group having been largely pieced together since 2012 as CEO Bradley Jacobs led it through a number of rapid and aggressive acquisitions. He acquired Norbert Dentressangle in 2015 for €3.25bn. Norbert itself had a history of growth via M&A, having acquired TDG and Christian Salvesen amongst others, both of which had significant domestic UK operations.
K+N also grew by acquisition in the UK, the Swiss forwarding group acquired large UK-based companies with a firm domestic focus in the 2000s, including Wm. Martin & Co. in 2005 and a 2011 purchase of RH Freight, for example. The acquisitions, however, provided a less direct link with the UK K+N operation and longer-term focus on international, end-to-end movements.
What, though, does the deal tell us about XPO, K+N and the future of the UK market?
1: Kuehne + Nagel’s “scalable leverage”
K+N is divesting itself of contract logistics operations in “drinks logistics, food services and retail & technology”. A common factor amongst these sectors is a heavier focus on domestic operations, and K+N’s stated rationale is that the deal allows it to focus more on high value-added services to the aerospace, government and pharma industry verticals in the UK. K+N sees these sectors as within its “scalable leverage areas”, and reinforces the company’s message that it is focussing on the provision of end-to-end solutions across forwarding and contract logistics services in high value-added sectors. Ultimately, it appears as though K+N’s rationale for the deal is to exit some complex business lines that did not entirely fit with its wider strategy and put itself on a more coherent path.
2: XPO Logistics increasing value through acquisition?
Only a few weeks ago, Jacobs put most of his business up for sale when he announced his intention to restructure the company by selling off a number of its largest divisions. In that light, this acquisition seems, at best, counterintuitive. Any sale of XPO Logistics Europe before mid-2021 (at least) seems highly unlikely with buyers almost certainly more willing to wait and see how any integration process unfolds on XPO’s dime, rather than jumping in and taking on the complexity and costs themselves. Success though – and it should be noted that Jacobs is amongst the best dealmakers in logistics today – will ultimately only enhance the value of the asset, and so while XPO Logistics Europe is not likely to be sold quickly, this move may add a not insignificant sum to the eventual deal.
3: an upheaval in the UK contract logistics market
Each year, Ti ranks the top 10 contract logistics providers in the UK. While DHL remains the uncontested leader of the pack, there is a solid mid-range mainly consistent of K+N, XPO, UPS and Wincanton. The dominant position of DHL Supply Chain’s UK operations (the result itself of acquisitions, the most notable of which remains Exel) is unlikely to be threatened by the newly larger XPO UK operation in the short-term. However, according to Ti’s analysis, the new combination will for the first time in more than a decade provide a credible competitor to DHL Supply Chain’s scale, with XPO gaining significant scale as a result of the deal.
4: what now for Wincanton?
The other side of the deal’s effects in the UK contract logistics market spells a more ponderous future for Wincanton. Several impressive years for the domestic-only contract logistics player has seen it grow strongly in retail logistics, particularly on the back of e-commerce, while it also has a notable food & drinks business – the exact type of operations XPO will inherit. Perhaps Wincanton will shift from a player roughly equal in size to both K+N and XPO, to a somewhat distant third as a result of XPO’s acquired growth. Moreover, Wincanton both lacks the backing of a global operation to finance expansion and the balance sheet make move-the-needle acquisitions of its own.
5: does Brexit matter in this?
At most of secondary importance. While it is easy to assume Brexit matters in everything UK logistics-related these days, the strategies motivating this move at both K+N and XPO are part of another game altogether. Perhaps one can read between the lines and see this as a vote of confidence in the UK market from XPO, but that would be a reach. K+N is focussed on a more coherent global contract logistics business that provides opportunities to leverage cross-company synergies. XPO sees an opportunity to enhance the value of an asset it seems determined to sell at some point. Brexit does not materially affect either.
What exactly the long-term effects of this agreement will be remain speculative; XPO’s strategy appears to contradict its actions, however, the move suggests a revamping of the acquired contract logistics portfolio in order to enhance the overall value XPO Logistics Europe asset, increasing its future price point. In the short-term, it appears a point of clarity is the formidable risk involved for Wincanton.
If Jacobs indeed remains keen to sell XPO assets, the natural question becomes who might be interested post-integration, and what might they buy? The what is perhaps easier. Divorcing the UK operations from the wider XPO Logistics Europe is now extremely unlikely, if indeed it ever was. As for XPO Logistics Europe, an already short list of perhaps 10 global LSPs who could afford the asset and who had the necessary capability to integrate it effectively is now likely even shorter. The remaining – and now more likely – candidates are those in the private equity world.
Source: Transport Intelligence, March 10, 2020
Author: Transport Intelligence