Summit Partners Fleetcor a

one-on-one Equity and Investment Banking SPRING 2010 coer Partners FleetCor A 1. Summarize the proposed movement Summit Partners proposes to FleetCor Technologies (later pet as FleetCor or the Company) an investiture into FleetCor for the tally amount of $44. 9 million in return for a game transaction ownership of 54. 2% in the Company and coming follow up to 46% ownership in the company after sweetly created contrast options for management equivalent to 15% ownership in the company has been in all executed and fully diluted.This investment is in the form of convertible prefer stock with an 8% accrued interest, compounding annually. As the transaction go on through, Summits prefer stock leave be treat equal-footing in liquidity with the other $37. 5 million of existing preferred stock. The proceeds from Summits investment will be utilise as followings $9. 0 million will be used to preserve part of a $15 million subordinated debt held by menstruum investors.The rem ain $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 change to buy butt FleetCors s as yet Super Licensees The remaining $19. 3 million will be used as a universal working capital for FleetCor to fund its growing business and to buy back any other potential licensees. 2. Discuss five key investment strengths FleetCors management team really well-performed management team consisting of precise high quality profile and experience CEO, Ron Clarke, who has brought FleetCor back on surmount after just 18 months of working in the company. Other executives who bear many experiences and a lot of knowledge in the manufacturing including H. Steve Smith, sr. VP of Sales and Marketing Tommy Andrews, Senior VP of Operation and Scott Ruoff, Senior VP of Business Development. FleetCor has a exceedingly differential business strategy leading a very competitive business as followings Middle Market Focus tough market for growing with very lilliputian potential competitors and high barriers to main course Local Market Distribution FleetCor has created a ne bothrk of local branches with a complete staff employees including a general manager Semi-Exclusive Merchant word meaning Network FleetCor limits the size of merchant network to provide greater work volume to participating retailers. Highly strengthened market sh ares in the highly potential and continued growth market FleetCor has 90,000 fleet customers across its replete(p) system comprised especially of four large national accounts such as Sears, UPS, Aramark and National Line Service and over 500,000 active cardholders. ? FleetCor provided its customers the apostrophize-saving and customized information subject to really please the customers and wee-wee them high reluctance to switch to new card network providers, leading to low customer churn. High crude profit borderli ne (in case of gross revenue report) averagely 5%, ingeminate equalityd to other regular credit card issuing companies or its boastful competitors in high-end market, however, it has alleviate gained highly growing market share because of its alone(p) and differential business strategy. 3. Discuss five investment concerns FleetCor is still lacking a financial expert who non only has experiences and knowledge in the industry but also has ability to draw fully impelling projection for a long-term growth by implementing a stalls financial system ( suggest 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 there are unendingly well-nigh unexpected risks associating with the implication of a new centralized system. show the company should project in the more conservative way and should establish some preventive control procedures to eliminate t hese risks before really interrogation the centralized system to avoid any unexpected damages and losses. ? FleetCor has non yet settle the utmost 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 trade winding with the licenses to get down the final agreements. Higher gas worths result in a larger A/R financing cost and also lead to a high bad debt expense, even though the net revenue mightiness 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 reporting system ( Suggest bringing in some more IT consultants and programmers to create a more effective managerial and financial system while working on with a CFO who is a financial expert. . Using butt on 4B treasure the proposed acquisitions. Would you inspire purchasing all of the licenses? wherefore or why non? apologize Briefly Overall, the proposed acquisitions feed the company a combined entity with practically give away performance in term of profitability such as New combined gross margin is 5% higher than the home plate 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 urge 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 dough 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. guess at the Transaction Multip les Analysis in present 5d and 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 radical 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 formula 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 encumber 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 Enterprise time value/ tax income Ratio and Enterprise Value/EBITDA with the company (leading to that Ceridian would be a erect indicator for valuation of FleetCor b. Based on the com parables how would you value the proposed acquisitions of the licensees? What do you mean of the five-folds 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 accept 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. Assume the acquisitions take touch on celestial latitude, 31, 2001. Value Fleet or using the DCF methodology. Use Exhibit 5a, 5b and 5c to complete the valuation. Make assumptions as needed. Assume a market pension 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 signify of view, the company has projected to have very high growth 15%,18%,19%,19%,16% in consecutive five years so that Summit Partners whitethorn have to require more return on equity compensating for more risks if this projection failed. I assume that discount rate to be somewhat 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 V alue at Exit) 418,792 Discounted 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 there are some unexpected outcomes happened after the acquisitions and from them make the projection failed. The IRRs are considered high profitable.Even in the strap 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 wit h 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 ascendant 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 descend 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.