DE Shaw sees opportunity to increase FleetCor margins


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Company: FleetCor Technologies (FLT)

Activist: DE Shaw & Co.

Percentage of ownership: n / A

Average cost: n / A

Activist Comment: DE Shaw is a large multi-strategy fund that is not historically known for its activism. The company is not an activist investor, but it uses activism as an opportunistic tool in situations where it is deemed useful. The company looks for strong companies in good industries, and if it identifies underperformance under management’s control, it will take an active role. DE Shaw places a high value on private and constructive engagement with management and as a result often comes to terms with the company even before its position is made public.

What is happening?

On March 15, DE Shaw Group and FleetCor Technologies have entered into an agreement under which the company has agreed to appoint Rahul Gupta (former CEO of RevSpring, a healthcare billing and payment company) to the board of directors, and has agreed to add another, mutually agreed-upon director to the board. In addition, the company has agreed to form an ad hoc strategic review committee to assist the board in reviewing various strategic alternatives. DE Shaw has agreed to abide by certain voting and standstill restrictions.

In the wings

FleetCor is a corporate payments company with four main business segments: fuel, corporate payments, tolls and accommodation. Fuel has traditionally accounted for nearly 50% of its revenue, and the market feels that as the world shifts to electric vehicles, it will become a terminal valueless business as revenue gradually declines. However, revenue from this business grew 14% over last year, and FleetCor has been working to integrate the transition to electric vehicle fleets into its future business strategy. In addition, revenues from the other three activities increased by 20% to 47% for a growth rate of total aggregated revenues of 20.9%. Earnings before interest, taxes, depreciation and amortization margins at all four businesses are near or above 50% with an overall EBITDA margin of 51.6%. Despite this, the company is trading at a discount to its peers due to the perception that it is primarily a fuel-dependent business with centuries-old 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 other high-growth, high-EBITDA businesses, which are expected to be re-evaluated as a result of the transaction. This could be an attractive asset for private equity, who can analyze and assess expected cash flows from the fuel business and work on a transition plan as EV penetration increases, without having to deal with misperceptions and biases of a public market.

FleetCor is already on this trajectory and is working amicably with DE Shaw. On March 20th, DE Shaw settled for two seats on the board and the company agreed to undertake a strategic review, including the possible separation of one or more businesses. Additionally, CEO Ron Clarke is loved and respected by shareholders and perfectly aligned to create shareholder value. Not only does he own 5.6% of FleetCor common stock, but his equity compensation plan is cash-strapped below $350 per share by the end of 2024 and pays him handsomely if the stock price continues. stock exceeds $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 13D activist investments.

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