WEX: Evolution1 Deal Bolsters Non-Fleet Offerings As Long-Term Growth Continues

Jun.18.14 | About: WEX Inc. (WEX)


WEX announces the $532 million acquisition of Evolution1.

This is as the company diversifies away from its core fleet business.

WEX's track record is very strong, shares offer appeal on dips.

WEX (NYSEMKT:WEX), the provider of corporate card solutions announced the acquisition of privately-held Evolution1 in a move which will bolster its non-fleet offerings, as it expands its presence in the healthcare business.

WEX has an excellent acquisition track record as well, having seen a profitable growth journey over the past decade. I like the shares, but won't jump on the momentum bandwagon with shares trading at their highs.

Deal Highlights

WEX announced that it has agreed to acquire Evolution1, which provides cloud-based technology and payments solutions for the healthcare industry.

WEX will pay $532.5 million in cash for the company with the deal expected to be accretive to adjusted earnings within a year after closing. WEX anticipates that the deal will close in the third quarter of this year after being approved in a unanimous fashion by the board of both companies.

In 2013, Evolution1 processed some 65 million transactions representing $5 billion in transaction volume. 90,000 enterprises and 10 million consumers are being serviced through its solutions within North America. The company employs about 300 workers currently.

Evolution1 has numerous products including 1Cloud, 1Direct, 1Pay, 1Mobile, 1Plan and 1View. These technology-based companies allow businesses to simplify payment, organization, usage and costs related to healthcare.

Strategic Rationale For The Deal

With the acquisition, WEX extends its scalable business into the high-growth and high-value markets for complex payment systems. This allows WEX to further simplify aspects of the healthcare payment system, while continue to expand into the fleet and travel industry.

Payments are crucial in the huge healthcare system which is complicated with both consumers, providers and payers interacting through intermediaries like employers and exchanges.

Within healthcare, WEX has traditionally focused on payment solutions to providers in a $1 trillion potential market opportunity. With the acquisition of Evolution1, WEX will also focus on B2B providing payment services to intermediaries as well.

Note that healthcare is an emerging growth business for WEX which is still very much focused on fleet solutions which allow companies to save money, reduce administration hassles, give them collective purchase efficiencies and monitor driving behavior.

Financial Implications

WEX pays $532.5 million for Evolution1 but it expects to benefit from $42 million in net present value from tax benefits, which lowers the effective purchase price to $490 million.

No quantitative details regarding Evolution1's revenues or earnings have been announced in the company's press release. Given the modest size of Evolution1 with roughly 300 in staff, the opportunity for cost savings will be limited. Rather the value has to be driven by revenue and strategic synergies, like sharing best practices and technology in particular.

Valuing WEX

At the end of March, WEX reported its first-quarter results. The company ended the quarter with $354.8 million in cash and equivalents. Total debt including term loans and revolving credit facilities stood at $681.2 million which results in a net debt position of $326.4 million.

Following the purchase of Evolution1, this net debt position will increase towards $850 million excluding cash being held by the acquired company.

At the time of the first-quarter earnings release, WEX guided for full-year revenues of $767 to $787 million, with adjusted earnings seen between $185 and $193 million. Note that GAAP earnings were about 10% lower than non-GAAP earnings in the first quarter.

Investors in WEX are pleased with the deal, sending shares to levels around $104 per share. This values the company's equity at $4.0 billion, or 5.1 times annual revenues. Shares trade around 21 times adjusted earnings which implies a GAAP multiple in the low to mid-twenties.

Long-Term Winner

Investors have seen great long-term returns. While shares fell from highs of $40 in 2007 to lows of $10 in 2008, a strong recovery have been witnessed ever since. In a rather straight line, shares have risen to current levels around $100 per share.

Underlying these returns has been a compounded annual growth rate of roughly 15% between 2004 and 2013. Over this time period, WEX has grown revenues from merely $189 million to $717 million in 2013. Earnings have grown rapidly as well as the company kept the outstanding shareholder base roughly equal over this time period.

The company generates three quarters of its revenues from fleet cards accepted at over 90% of the fuel stations within the US and over 45,000 maintenance locations. Some 7.7 million cars have seen their fuel purchased for by WEX's cards.

Focus From Fleet To Other Areas

WEX saw its IPO back in 2005 when it was still very much focused on fleet solutions. It still is the #1 fleet card provider with a 15% market share within the US according to the company's investor presentation.

Through its proprietary software it can control purchases in the field, allowing companies to achieve fuel discounts through collective purchasing while it provides valuable data for analysis which allows them to reduce operating costs. This business model is highly scalable and results in stable and high operational cash flows.

Besides the focus on in fleet solutions, the company has focused on other areas to use its technology in order to achieve scale, security and analysis for customers including the market for travel, healthy and employees. This business now makes up roughly a quarter of sales, growing at a compounded annual growth rate of 48% between 2008 and 2013. This growth has been driven by numerous acquisitions including the announced Evolution1 deal.

Implications For Investors

After great momentum in recent years, shares of WEX have been trading flat so far this year. This is despite a temporarily correction witnessed with shares trading around $80 in February of this year.

The company has deserved today's premium valuation given the strong track record of the firm, yet this does not automatically makes it a buy at current levels. Shares trade at roughly 22 times earnings as leverage will increase on the back of the new growth acquisition.

Perhaps a re-test of that $80 level might be an interesting entry point for this steady but impressive growth story. At those levels investors are able to buy a steadily growing premium player which is posting solid profits at levels which trade at par with wider equity markets.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.