While some payments companies are battening down the hatches in the face of rising economic headwinds, others are scoping the horizon for affordable acquisitions.

Wex, which provides payment software services for corporate and government entities, is taking the latter approach. The global company’s CEO, Melissa Smith, credits the current economic turmoil for lowering the price tags on targets, after prices climbed in recent years.

“Because we’re growing, and because we have a resilient business model, we think that from an M & A perspective, that puts us in a strong position,” Smith said in an interview last week. “We’re really focused on how, if we go into a period of uncertainty, we can really accelerate the advantage that we have in the marketplace.”

The Portland, Maine-based company’s growth has been strong, with third-quarter revenue climbing 27% to $616.1 million and total transaction volume soaring 41% to $57.5 billion, according to the Oct 27 earnings press release. However, Wex’s third-quarter bottom line swung to a loss of $44.1 million from a profit for the period last year.

Wex has two main business segments: one division that provides card and payment services for use by companies and governments that operate truck fleets and another division that provides corporate customers with embedded payments services that can also be white-labeled by financial institutions. A third, smaller division offers software services for healthcare benefits administration.

Wex “growth may remain above normal over the next few years,” thanks to the recovery of travel, a rise in corporate payments and higher interest rates, but fears related to fuel prices, volatility in travel and higher leverage will likely put a damper on the growth multiple, analysts at the financial firm Baird Equity Research said in a Nov. 8 note to investment clients. The firm has an “outperform,” or buy, rating on Wex.

There are indications Wex’s customers may be struggling with the high fuel prices. The company’s third-quarter late fee revenue of $83 million was equivalent to 22% of fleet revenue, according to analysts at Mizuho Securities. “This is the highest since 4Q19 (24%) and well above the 2017-2019 average of 17%,” the Mizuho analysts said in an Oct. 27 note to their clients regarding the third-quarter results.

To bolster the company’s financial position, Smith said she aims to squeeze $100 million in savings out of the business next year, enhancing Wex’s position for potential purchases.

The CEO, who has led the company since 2014, refers to Wex as a “serial acquirer.” Her goal has been to increase annual revenue 10% to 15% annually, excluding the impact of foreign exchange and fuel prices, with about two to three percentage points of that growth deriving from acquisitions. 

In terms of acquisitions, the company has targeted the energy, health benefits and corporate payments areas for its purchases and that continues to be where it is hunting for good buys, Smith said. 

Wex might be overdue for a deal. Its most recent transaction was the purchase of the healthcare benefits administration technology company Benefit Express Services in June 2021. That deal cost the company $275 million, according to the company’s March annual filing with the Securities and Exchange Commission. 

By Lynne Marek on Nov 11, 2022
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