D.E. Shaw spots an opportunity to boost margins at FleetCor – and do so amicably

Business: FleetCor is a business payments company that helps businesses spend less by enabling them to manage their expense-related purchasing and vendor payments processes. The company operates through six segments: fuel, corporate payments, tolls, lodging, gift and other. It offers corporate payments solutions, such as accounts payable automation; vehicle and mobility solutions, including fuel solutions to businesses and government entities that operate vehicle fleets, as well as gift card program management and processing services. The company also provides other products, including payroll cards, vehicle maintenance service solutions, long-haul transportation solutions and prepaid food vouchers or cards.

Stock Market Value: $15.5B ($210.85 per share)

Percentage Ownership: n/a

Average Cost: n/a

Activist Commentary: D.E. Shaw is a large multi-strategy fund that is not historically known for activism. The firm is not an activist investor, but it uses activism as an opportunistic tool in situations when it’s deemed useful. The firm seeks solid businesses in good industries, and if it identifies underperformance that is within management’s control, it will take an active role. D.E. Shaw places a premium on private, constructive engagement with management and as a result often comes to an agreement with the company before its position is even public.

On March 15, D.E. Shaw Group and FleetCor Technologies entered into an agreement pursuant to which the company agreed to appoint Rahul Gupta (former CEO of RevSpring, a health-care billing and payments company) to the board, and agreed to add another, mutually agreed-upon director to the board. Additionally, the company agreed to form an ad hoc strategic review committee to assist the board as it considers various strategic alternatives. D.E. Shaw agreed to abide by certain voting and standstill restrictions.

FleetCor is a business payments company with four main business lines: fuel, corporate payments, tolls and lodging. Fuel has traditionally comprised almost 50% of its revenues, and there is a perception in the market that as the world transitions toward electric vehicles, this will become a business with no terminal value as revenue gradually declines. However, revenue in this business increased 14% from last year, and FleetCor has been working to incorporate the transition toward EV fleets into its future business strategy. Moreover, revenue in the other three businesses is growing at 20% to 47% for an aggregate total revenue growth rate of 20.9%. Earnings before interest, taxes, depreciation and amortization margins in all four businesses are close to or over 50% with an overall EBITDA margin of 51.6%. Despite this, the company is trading at a discount to peers because of the perception that it is mainly a fuel-reliant business with secular headwinds.

The best way to realize the full value of each business is to explore a separation of the fuel business, removing any stain on the other high growth and high EBITDA business, which should get a re-rating from the transaction. This could be an attractive asset to private equity, which can analyze and value the fuel business’s expected cash flow and work on a transition plan as EV penetration increases all without having to deal with the misperceptions and biases of a public market.

FleetCor is already on this trajectory and is working amicably with D.E. Shaw. On March 20, D.E. Shaw settled for two board seats and the company agreed to undertake a strategic review, including the possible separation of one or more businesses. Moreover, CEO Ron Clarke is liked and respected by shareholders and perfectly aligned to create shareholder value. Not only does he own 5.6% of FleetCor’s common stock, but his equity compensation plan is out of the money below $350 per share by the end of 2024 and pays him handsomely if the stock price is over $350 by then.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.