Payment technology company WEX Inc. plans to purchase competitor Electronic Funds Source for nearly $1.5 billion in the South Portland company’s largest acquisition to date.
WEX said Monday that it has signed an agreement to buy the Nashville, Tennessee-based company for about $1.1 billion in cash and 4 million shares of common stock. WEX stock was valued at $92.11 per share when the market closed Friday, the day the agreement was signed, bringing the total value of the planned acquisition to $1.47 billion.
WEX, one of the area’s largest employers with about 700 of its 2,000 workers in Maine, has been on a buying spree over the past two years as it expands into payment processing markets for the health care and tourism industries. Company officials say the deal expands market share, creates efficiencies and provides a more diverse customer base, but some analysts say WEX’s reliance on debt for acquisitions could hamper its ability to weather adverse conditions.
WEX was founded in 1983 as Wright Express, which developed technology to simplify payment processing for vehicle fleets.
Electronic Funds Source, or EFS, is owned by investment funds affiliated with New York-based private equity firm Warburg Pincus LLC. Warburg Pincus reportedly paid more than $1 billion for EFS in 2014.
The deal with WEX would make Warburg Pincus WEX’s largest shareholder with about 9 percent of all outstanding shares, the company said, and its managing director, Jim Neary, would join WEX’s board of directors.
WEX President and CEO Melissa Smith said EFS focuses on a different customer base complementary to that of WEX. EFS primarily provides payment services to medium-sized and large fleets of “over-the-road” vehicles such as tractor-trailers, whereas WEX specializes in local fleets of cars, trucks and vans, in addition to small over-the-road fleets.
“From an investor standpoint, this is a win in terms of synergies and scale,” Smith told the Portland Press Herald.
The combined company would have more diverse sources of earnings and would be less sensitive to the rise and fall of gasoline and diesel fuel prices, she said. Lower fuel prices have cut into WEX’s earnings in recent months, since roughly one-third of the company’s revenue is based on a percentage of the amount its customers spend on fuel. Only 25 percent to 30 percent of the combined company’s revenue would be subject to fuel-price fluctuations, Smith said.
The deal also would be good for WEX and EFS customers, she said, because it would expand the number of products and services available to them.
“I’m really excited about the transaction,” Smith said.
Under the agreed-upon conditions of the proposed deal, EFS President and CEO Scott Phillips would continue to lead his side of the combined company and would report directly to Smith.
“We are very pleased to be joining forces with a great organization like WEX, which shares our focus on continued product innovation, superior service and maintaining long-term customer relationships,” Phillips said in a written statement. “I look forward to joining the WEX organization, as this combination represents a great match and a win-win for the employees and customers of both companies.”
WEX provides corporate payment services, primarily for company vehicle fleets. It also provides payment services to the travel and health care industries. The company operates in the U.S., Australia, New Zealand, Brazil, the United Kingdom, Italy, France, Germany, Norway and Singapore.
WEX has made several acquisitions in recent years. Its largest to date was North Dakota-based Evolution1, a technology firm that facilitates patient payments to health care providers, which WEX purchased in July 2014 for $532.5 million in cash. In 2013, it acquired the Fleet One fuel card company for $369 million in what previously had been its largest purchase.
In December, the company completed the acquisition of a controlling share in ExxonMobil’s European Esso Card fuel card program for $60 million. The deal, first announced in November 2013, gives WEX a 75 percent ownership stake and is expected to add $35 million to the company’s annual revenue.
Last Thursday, WEX said it plans to acquire Omaha, Nebraska-based health care billing software company Benaissance for $80 million.
Some analysts expressed concern about the amount of money WEX has been borrowing to make acquisitions. Moody’s bond-rating service analysts Warren Kornfeld and Robert Young issued a statement Monday reaffirming their negative outlook from July 2014 that rated WEX bonds as Ba3, which is below investment grade. Ba3-rated bonds are considered speculative, meaning there is a risk that the debt won’t be repaid and investors will lose their principal.
Kornfeld and Young questioned the company’s ability to absorb further debt, saying the EFS acquisition would push WEX’s debt-to-earnings ratio well above its historical average.
“This is the second large acquisition for the company in two years with both acquisitions being financed largely with debt,” the analysts wrote.
The issuance of 4 million new shares of stock to Warburg Pincus would dilute other shareholders’ stake in the company by about 9 percent, but Smith said the acquisition of EFS would create additional earnings immediately and generate an anticipated $25 million in annual cost savings over the first three years.
Investors responded positively to the news. Shares of WEX, which trade on the New York Stock Exchange under the symbol WEX, increased by $4.01 a share Monday, ending the day at $96.12.