is on the hunt for acquisitions as the Covid-19 pandemic changes the world of business payments, according to Steve Greene, executive vice president of corporate development and strategy.
Covid-19 spurred a rise in digital payments as consumers, armed with apps and used to near instantaneous payments, ditched cash. Companies have been slower to adopt business-to-business electronic payments, but that’s changing, he said.
Electronic payments comprise 57% of all business payments, according to Ardent Partners, a research and advisory firm. A significant chunk, 43%, is still manual, including paper checks, Ardent said in the report, “The State of ePayables 2020: Ensuring Continuity, Building Resiliency, and Rising to the Challenge.”
B2B payments will likely catch up as companies adapt to Covid-19, Greene said. Everything from the apps people use to communicate when marketing to transfers of funds needs to be cloud-based, Greene told Barron’s.
How companies sell has changed during the pandemic. Prior to Covid-19, companies typically relied on “feet-on-the-street,” in-person interactions to sell. That disappeared overnight, Greene said, and selling that doesn’t require person-to-person exchanges has become correspondingly more important. Greene said he doesn’t think the world will return to in-person selling and paper-based payments once the pandemic ends.
“B2B payments migration to the cloud has been a long-time coming, but Covid-19 – and the immediate need to go virtual – has accelerated the pace of innovation for corporations,” Greene said. “The back office is no longer something that can sit on the back burner. Companies are realizing the necessity of digital payments and the long-term business benefit.”
Founded in 1986, FLEETCOR (ticker: FLT) provides payments services in five categories including fuel, lodging, tolls, corporate payments, and gifts. The Atlanta company employs more than 8,000 people. It has 800,000 business customers and processes two billion payments transactions annually. FLEETCOR produced $2.65 billion in revenue in 2019, according to the company’s website.
As Covid-19 has changed the business landscape, FLEETCOR is looking more at areas adjacent to payments where it can help clients, Greene said. The company recognizes that its customers have much work to do before making a payment, such as figuring out how much to pay suppliers and making sure invoices are approved, Greene said.
“Having software and tools that they can use remotely to keep their businesses running is very important,” he said.
Payments remains a major area of focus for FLEETCOR, which acquired CambridgeGlobal Payments, a B2B payments provider, for $690 million in 2017. In September, FLEETCOR agreed to buy Associated Foreign Exchange or AFEX, a cross-border payments provider, for $400 million to $500 million, Barron’s has learned.
The deal is expected to close in the first quarter. AFEX, of Woodland Hills, Calif., annually processes $22 billion in foreign-exchange transactions, and has a heavy focus on the U.K. and Asian-Pacific region, Greene said. The deal is expected to make Fleetcor the premium nonbank provider of foreign-exchange services for businesses, he said.
FLEETCOR is constantly looking for deals, Green said, but the search has been hampered by the pandemic. Mergers more or less stopped, beginning in March, and although they have rebounded somewhat, payments deals have not generally been part of the revival.
The dearth of transactions is due to a price disconnect between buyers and sellers, Greene said. Sellers have a hard time determining what their numbers will be during the Covid-19 recession, making it difficult for them to convince buyers to pay top dollar, he said. Owners of good businesses aren’t willing to accept a discount in valuation due to a transitory once-in-a-lifetime event, Greene said.
“People don’t want to sell for 20% less,” he said. “People want to wait until the recovery happens.”
Higher-quality payments companies will likely tap the public equity markets, Greene said. He pointed to
(BILL), a business payments software company that received an investment from FLEETCOR in April 2019. Bill.com went public in December. The stock is trading at $96.6, more than four times Bill.com’s $22 IPO price.
“Nothing breeds more IPO activity than successful IPOs,” he said.
When it comes to M&A, FLEETCOR is looking to invest $1 billion this year, he said. FLEETCOR continues to seek companies in fuel, tolls, lodging, and payables to strengthen its position, Greene said. It will consider larger transactions, north of $2 billion to $3 billion, as well as medium-size transactions similar to AFEX, he said. It is also always seeking deals in new geographic areas.
FLEETCOR, however, will likely not take part in any megadeals, those transactions valued at $10 billion or more, he said. But it will consider mergers in the $2 billion to $5 billion range. “Certainly those kinds of deals we’ll be interested in,” he said.