Summit Partners Fleetcor a

Private Equity and Investment Banking SPRING 2010 front Partners FleetCor A 1. Summarize the proposed transaction line of longitude Partners proposes to FleetCor Technologies (later preferred as FleetCor or the federation) an enthronement into FleetCor for the total amount of $44. 9 million in return for a post transaction ownership of 54. 2% in the Company and flood tide down to 46% ownership in the company after impudentlyly created persuade options for management equivalent to 15% ownership in the company has been completely executed and fully diluted.This investment is in the form of convertible preferred stock with an 8% accrued interest, compounding annu whollyy. As the transaction come through, Summits prefer stock will be treated equal-footing in liquidity with the new(prenominal) $37. 5 million of existing preferred stock. The proceeds from Summits investment will be used as followings $9. 0 million will be used to redeem part of a $15 million subordinated debt he ld by current investors.The remaining $6 million of this debt will be converted by the current investors into the same strip of prefer stock which Summit proposes. About $16. 6 million will be used as an upfront cash to mickle back FleetCors s til now crack Licensees The remaining $19. 3 million will be used as a common working capital for FleetCor to fund its growing business line and to buy back any otherwise potential licensees. 2. Discuss five key investment strengths FleetCors management team genuinely well-performed management team consisting of very(prenominal) high quality profile and experienced CEO, Ron Clarke, who has brought FleetCor back on track after just 18 months of working in the company. Other executives who have many experiences and a lot of knowledge in the industry including H. Steve Smith, Senior VP of Sales and Marketing Tommy Andrews, Senior VP of Operation and Scott Ruoff, Senior VP of Business Development. FleetCor has a highly differential gea r business st considergy leading a very competitive business as followings Middle Market Focus big merchandise for growing with very little potential competitors and high barriers to entry Local Market Distribution FleetCor has created a network of local branches with a complete staff employees including a general manager Semi-Exclusive Merchant Acceptance Network FleetCor limits the size of merchant network to provide greater traffic volume to participating retailers. Highly established market shares in the highly potential and continued growth market FleetCor has 90,000 fleet customers across its entire system comprised especially of four large national accounts such(prenominal) as Sears, UPS, Aramark and National Line Service and over 500,000 active cardholders. ? FleetCor provided its customers the cost-saving and customized information report to really please the customers and subscribe them high reluctance to switch to new card network providers, leading to low customer c hurn. High gross profit margin (in case of gross revenue report) averagely 5%, double compared to other regular credit card issuing companies or its big competitors in high-end market, however, it has still gained highly growing market share because of its unique and differential business strategy. 3. Discuss five investment concerns FleetCor is still missing a financial expert who not only has experiences and knowledge in the industry but in any case has ability to draw fully effective projection for a long-term growth by implementing a stable financial system ( notify Hiring a highly effective and experienced CFO. ? High projected improvements after the acquisition. The company should be a little to a greater extent conservative due to the fact that on that point are al looks some unexpected risks associating with the implication of a new centralized system. Suggest the company should project in the more conservative way and should establish some preventive control procedures t o eliminate these risks before really testing the centralized system to avoid any unexpected damages and ventes. ? FleetCor has not yet settle the final agreements with the seven Super Licensees for acquiring them, creating some sources of unstable and going concern business ( Suggest the company should be more specific and aggressive while dealing with the licenses to make the final agreements. Higher gas prices result in a larger A/R support cost and also lead to a higher bad debt expense, even though the net revenue major power still be the same ( Suggest implement some forms of hedging strategies against the increases in gas prices such as going long on a call option at a specific gas price which might materially increase the A/R financing cost and bad debt expenses. ? FleetCor currently has weak managerial describe system ( Suggest bringing in some more IT consultants and programmers to create a more effective managerial and financial system while working along with a CFO w ho is a financial expert. . Using give 4B evaluate the proposed acquisitions. Would you recommend purchasing all of the licenses? Why or why not? Explain Briefly Overall, the proposed acquisitions yield the company a combined entity with much smash performance in term of profitability such as peeled combined gross margin is 5% higher than the base only. EBIT margin is almost 3. 75 times higher than the base only. EBITDA margin is over 1. 5 times higher than the base only.I recommend FleetCor only acquire 5 effectively operated Licensees out of the seven ones including the ones in the areas of Houston, Carolina, Mississippi, Baton Rouge, and Atlanta because the other two which are locating in Chicago and Tampa are inefficient in term of profitability. Licensee in Chicago will yield a loss of EBITDA and the one in Tampa yield only $83,000 of EBITDA which is very small compare to the cost of acquiring this licensee. 5. Look at the Transaction Multiples Analysis in screening 5d a nd 6. Analyze the comparables (Exhibit 6) a.Would you recommend using all the comparables listed? Would you exclude any of the comparables? Explain your answers. I would not recommend using all the comparables listed. I would exclude all of the comparables from assort of credit card issuers because FleetCor has been operating its business as a merchant card processor which is different from the credit card industry. Basic dogma for valuation using industry comparables is that we have to use comparables for the group of companies in the same industry with the valued company.I might want to keep the comparables for the group of other transaction processors. Through my observation, I find that Ceridian which is in the same industry with FleetCor has the most similar initiative economic value/Revenue Ratio and Enterprise Value/EBITDA with the company (leading to that Ceridian would be a good indicator for valuation of FleetCor b. Based on the comparables how would you value the propo sed acquisitions of the licensees? What do you think of the sextuples proposed in exhibit 5d?Basing on comparables data of Ceridian, I would value the proposed acquisitions of the licensees at 13. 1xEBITDA. I think the multiples proposed 3. 9x in 2001 and 3. 3x in 2002 in exhibit 5d are way below the multiple of Ceridian, and even much lower when compare to the industry average 16. 9x and 15x accordingly. In general, if the final transaction is completed as proposed, the company will be much better off, and even better if the company exclude the acquisition of the two licensees in Chicago and Tampa.In addition, if all of the big seven licensees do not experience the acquisitions at this proposed multiples, Summit might suggest the FleetCors management to raise these multiples and deal specific case to case with each of the licensee. 6. deliver the acquisitions take perpetrate on December, 31, 2001. Value Fleet or using the DCF methodology. Use Exhibit 5a, 5b and 5c to complete t he valuation. Make assumptions as needed. Assume a market premium of 4. 5%. Make sure you state and explain your assumptions. I will use the equity beta of Ceridian (? =0. 9) to calculate cost of equity for FleetCor because the two companies are considered comparables. Assume the market has been operating efficiency, and according to CAPM RE = RF + ? *MRP (whereas MRP market risk premium= 4. 5%, and RF = 4. 27%, 5-year Treasury interest rate). So, RE = 4. 27% + 0. 79*4. 5% = 7. 825%. Another point of view, the company has projected to have very high growth 15%,18%,19%,19%,16% in consecutive five historic period so that Summit Partners may have to require more return on equity compensating for more risks if this projection failed. I assume that discount rate to be reasonably 18%. The below is my valuation Fiscal Year Ending December 31, 2001 CY 2002P 2003P 2004P 2005P EBITDA in 2006 52,349 Exit Multiple 8 Terminal Value (Firm Value at Exit) 418,792 Discoun ted Terminal Value 183,058 Total Present Value to Summit 226,602 Discount Rate using 18% 7.Look at Exhibit 7. What do you think of the multiples used? What do you think of the Irrs? Explain and support your analysis. I think the multiples used are reasonable , even though, these multiples might be much below the average and the median of the industry overall, Summit should be conservative for an exit multiple of 8 in case on that point are some unexpected outcomes happened after the acquisitions and from them make the projection failed. The IRRs are considered high profitable.Even in the worst case scenario, the EBITDA exit multiple is equal 6, Summit still make 23. 8 % in IRR which is over three times compares to the market at 7. 825%. 8. At this time would you support this transaction? Why or Why not explain. I would fully support this transaction because of the following reasons 1) FleetCors management teams with high profile, experienced, and knowledge executives will make the companys high projection come true. ) The proposed acquisitions of the big seven licensees has been settled in basis, and soon become a very good deal for the beginning of this investment. 3) Base on my valuation given using the data in Summits projections, the NPV (Net Present Value) is way off the positive minute showing that this is a very good project. 4) Even though, Summit might approach a conservative way to evaluate the EBITDA exit multiple of 8, the investment still yield a 31. 8% in IRR over the period of five years.