WEX Inc. (WEX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the acquisition of eNett and Optal by WEX. [Operator Instructions] Thank you. Now I would like to turn over the call to Mr. Steve Elder. Sir, the floor is yours.

Thank you, operator. Good morning and thank you, everyone, for joining us today. With me today is Melissa Smith, our CEO; and our CFO, Roberto Simon. The press release we issued earlier today and the slide deck we will reference during the call have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release and the slide deck have also been included in the 8-K we submitted to the SEC. The purpose of this call is to discuss this morning's acquisition announcement. Accordingly, we request that questions be limited to those relating to this announcement. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, during our call. Please see our most recent quarterly earnings announcement for an explanation of the adjustments included in this measure. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements, as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2018, and filed with the SEC on March 18, 2019, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa Smith.

Thanks, Steve. Good morning, everyone, and thank you for joining us today on short notice. Earlier this morning, WEX announced that it has entered into a definitive agreement to acquire eNett, a leading provider of B2B payment solutions to the travel industry; and Optal, a company that specializes in optimizing B2B transactions. WEX will pay total consideration of approximately $1.7 billion. We're very excited to share with you the news of this transaction as well as the rationale behind it. Starting with Slide 3. I want to briefly discuss the terms and details of the acquisition before delving into how this combination creates the foremost B2B payments leader in the global travel marketplace. As you likely already saw in this morning's press release, we signed an agreement to acquire eNett and Optal for approximately $1.7 billion, which includes approximately $1.275 billion in cash and approximately 2 million shares of WEX common stock paid to the sellers. We've had an eye on these companies for a while and are excited about the opportunities this combination will bring. In addition to the strategic benefits of this combination, which I will discuss in a moment, we expect to realize financial benefits as well. In particular, the acquisition will be accretive to adjusted net income earnings per share in the first year following closing. We also expect to realize run rate synergies of approximately $25 million within 24 months after closing the transaction, excluding one-time cost to achieve the synergies. We anticipate the transaction will close midyear 2020, subject to regulatory approvals and other customary closing conditions. Moving on to Slide 4. I'd like to give you some additional background on eNett and Optal. Their joint offering has a strong presence in both the EMEA and APAC regions and has been providing innovative travel payment products and solutions to many of the largest online travel agencies, including Booking.com, Agoda, AirAsia, and Club Travel, among others. The primary product offerings include virtual account number issuance or what we have historically called virtual cards, credit card processing, electric funds transfer and merchant services. They also provide card authorization and settlement services as well as performance tools and wholesale solutions. Importantly, eNett and Optal have an impressive multicurrency capability offering 58 different currencies to settle transactions. For the full year of 2019, eNett and Optal's combined revenue is expected to be approximately $150 million to $160 million, subject to any adjustments to conform to U.S. GAAP. Let me now share with you why we think the acquisition is an ideal complement to WEX. First, we believe this transaction will accelerate our global growth strategy. Since 2016, eNett and Optal have grown their combined purchase volume at a compounded rate of 36%, which will further strengthen WEX's growth engine. We also believe that the combined company is ideally positioned to capture additional share of the large and growing global travel market. According to Phocuswright, online travel within the Asian market, in particular, is the fastest-growing segment of the travel market. The global online travel market has a growth rate of approximately 9%, which is roughly twice the rate of the overall travel market. Importantly, this transaction combines leaders in the travel payment industry with highly complementary geographic footprints. As I just mentioned, the majority of eNett and Optal's business resides in EMEA and Asia Pac, while a large portion of ours comes from North America. At our last Investor Day event, we outlined our acquisition criteria. First, to acquire high-growth companies; second, to reduce our earnings exposure to retail fuel prices; and third, to expand and diversify geographically. This acquisition meets all 3 of these points. Beyond geographic diversification, this acquisition accelerates WEX's revenue growth and further reduces WEX's exposure to macroeconomic factors, including fuel price fluctuations, while increasing our exposure to the high-growth travel segment. Furthermore, this combination also strengthens WEX's product portfolio, enhancing our leadership in the travel market. This transaction brings a second geographically dispersed payments technology platform to further support our customers. Lastly, this is a financially attractive transaction, which will strengthen WEX's revenue growth and extend product capabilities to our customers. Importantly, the transaction is expected to be accretive to WEX's adjusted net income EPS in the first year following the transaction close. Now I'd like to hand over to Roberto, who is going to provide detail on the pro forma company. Roberto?

Thank you, Melissa, and good morning, everyone. Let's just start on Slide #6, where we have provided a financial snapshot of eNett and Optal. As you can see, this acquisition brings significant purchase volume, revenue and growth to WEX, enhancing our position as the foremost leader in the global travel space. As Melissa mentioned, this transaction provides greater geographic diversification in the travel business and will significantly expand our footprint in the EMEA and APAC regions. Additionally, it will enable WEX to reach new customers and markets with best-in-class products, and at the same time, increase the scale. Based on the strategy to continue diversifying the business, this transaction will continue to reduce our exposure to retail fuel prices as we integrate the companies. Let us move now to Slide #7 to talk about the financial considerations. We have received committed financing from our relationship banks that includes approximately $1.4 billion in new debt to finance the cash portion of the deal and the expenses related. The remaining $425 million of the purchase price will be funded with approximately 2 million shares of WEX common stock paid to the sellers. The share value is based on the volume weighted average price of the WEX shares over the 30 trading days prior to signing. As we move closer to the closing date, we will evaluate market conditions and determine the best combination of instruments at that time. The combined business is expected to generate significant cash flow, which will be used to rapidly delever our balance sheet. Based on the committed financing, we expect the leverage ratio to be no more than 4.5x upon closing. Going forward, we expect to delever between 0.5 turn and a full turn per year. This will put us back within our long-term target leverage range of 2.5 to 3.5x between 9 and 18 months after closing. Also, from a credit rating point of view, we expect to maintain our current ratings. Finally, WEX will benefit from an improved revenue growth profile and EBITDA margin expansion. The transaction will be accretive to revenue growth and adjusted net income per share in the first full year after closing. We have also identified substantial synergies totaling $25 million, excluding cost to achieve them. We expect to capture the synergies within 24 months following the close of the transaction. And with that, I would like to turn the call back to Melissa for some final thoughts.

Thanks, Roberto. In summary, Slide 8 shows how this acquisition will strengthen our travel business and enable WEX to capture additional share of the large and growing global OTA market. This transaction combines well-respected leaders in the travel payment space with highly complementary geographic footprint. Our combined technology and product portfolio will be stronger, enabling us to better meet the needs of our customers globally. Additionally, as I mentioned earlier, we expect significant financial benefits as well, including accretion to our ANI within the first 12 months as well as the opportunity to capture $25 million in synergies, excluding cost to achieve them. We are confident that the combination will create shareholder value and look forward to working with eNett and Optal teams to successfully integrate our great businesses. With that, operator, please open the line for questions.

[Operator Instructions] Your first question is from Bob Napoli.

Very interesting transaction. I guess when eNett was public, they reported, as part of Travelport revenue in 2018, an EBITDA of $315 million and $37 million. I'm guessing the revenues apples to oranges, and you're using a net revenue, but the EBITDA -- so could you give some thoughts on valuation relative to what they reported? What the EV to EBITDA might be?

So Bob, this is Roberto. Obviously, we are not going to get specifics on EBITDA for the combined entities at this point. But what we can tell you is when we went through the valuation, if you take into consideration 2020 forward-adjusted EBITDA, including run rate synergies, the transaction multiple is going to be approximately 13.9x. And we see now, we are very comfortable with the price we are paying for it based on where the market and the companies are trading today.

And then I think you share some customers. And what do they give you? What does Optimal bring to the table -- Optal bring to the table? Is it -- and what additional -- other than geographies do they give you? And are there revenue synergies? I mean they were known to be aggressive on pricing. Does this take some of the pricing pressure out of the industry?

So I think there's a bunch of things that I can unpack from what you just asked.

Yes, that's correct.

Overall, part of what we like about this transaction, and I talked about the geographic diversification, each of us have relationships with the major OTAs. What this allows us to do is strengthen and deepen those relationships. It also does add new products into the portfolio. So you talked about some of the mechanisms that they've used before allows their online travel agency to use their own balance sheet and to be able to make payments on their behalf, but doing it on more of a real-time basis. And so that's the product that we're going to be able to allow our customer base to have access to. So it gives us the functionality that we have, the access to the credit facility, in the banks that we own as well as new products that eNett and Optal bring to the table. And in addition to that, you asked some questions about Optal. They really work in conjunction with one another. Think of Optal as the one that has done all of the regulatory and compliance work, the issuing sits there. And eNett is the company that's been doing sales and marketing and a lot of the product development work. But they have coexisted even though they have separate ownership structures.

Then on the revenue synergies or...

Yes, we...

[ Pricing structures ].

In our past, we have not historically modeled in revenue synergies when we think about transactions. And at the same time, we've had a really good history of being able to take 1 plus 1 and make it equal to 3. And most of that has been on the revenue side. So we do believe that there is opportunity here when you look at the 2 companies together, but that is not the basis that we used when we valued this transaction.

Your next question is from Ramsey El-Assal.

So Optal does some other interesting things, like you were mentioning merchant services and EFT. Could we see WEX kind of begin to diversify into other payment processing areas? I mean historically, you kind of mentioned that you were content to play in your 3 primary kind of business lines. But could this deal be sort of the thin end of the wedge to your pursuing some other sectors in the payments industry?

Yes. The vast majority of what they do is relating to virtual card payments, and it is related to the travel marketplace. It is interesting that the additional services that they provide. So when we look at [ potential ] revenue synergies and product synergies, it's something that we will continue to explore. But think of that as kind of the minor part of when we look at this transaction, that the major part being more the geographic diversification that we have, the additional to really strengthen the relationships with the customers. There are a couple of products that they have in the mix, specifically within the travel space, which we think is going to be interesting for us to look across our global portfolio.

Okay. And then just on the company's growth rate. Historically, it seems to be -- have grown a little faster than you're kind of projecting it to grow going forward. Is that more conservatism? Is that just the law of large numbers? Has there been any changes in the business? Or was the historical -- was there an organic contribution? Just a little commentary on the trajectory of growth would be helpful.

Yes. Some of it is the law of larger numbers. So if you look at the growth profile of the company, we feel really good about the growth prospect. We also like -- if you look at the regions that they are -- have been in, those are regions that are growing faster and where you're seeing more migration also to the merchant model. So there's a lot of really good benefit of being in the regions that eNett and Optal have operated in and having an emphasis there, which is a big part of our deal thesis. So you start with really good macro trends that are happening. When we gave you the forward look at this, looking at this on a combined basis of what we think the combined business will do. And we talked about it combined saying in that same range that we had given out previously at Investor Day for the segment.

Okay. And just sneaking a quick housekeeping one. What is the interest rate on the new debt that you're raising? And then I'll hop back in the queue.

This is Roberto. So when we have more or less interest rate for this transaction now based on what we know today, is a LIBOR plus and a spread of 250 basis points on the term B that we got on the committed financing. And obviously, I would like to point out that each of the rates are subject to change as we move to the closing period.

Your next question is from the line of Sanjay Sakhrani.

This is Vasu Govil for Sanjay. Just wanted to follow-up on that question on revenue growth. I mean longer term, you've said it's 10% to 15%, which is in line with the travel vertical. Should we expect sort of a higher growth rate in the medium term? And then how to think about the margin profile of the acquired business? And sort of if you could help us with the magnitude of EPS accretion in year 1.

So let's just start with the revenue growth. I say Melissa has been clear. I mean eNett and Optal have been growing really very, very strong. And we posted a couple of KPIs for the last 3 years, where volume for the combined entities was 36% growth, and revenue growth was also very strong. The second thing, as Melissa said, is our long-term targets for this segment are not changing. Now we are adding a significant amount of extra revenue, so the base is significantly bigger. And when we look on the -- our long term, we still believe that the long-term range of 10% to 15% is the right growth rate for us. It could be that, in the short term, while we are doing the combination of both, you see a pop -- small pop-up, but we don't believe that this is going to change our profile on the long term. And then your second question was related to accretion?

Yes, the margin profile and the accretion in year 1. And if you're assuming any synergies, cost synergies in year 1 as well, in the EPS accretion.

So we said today that we expect adjusted net income EPS to be accretive within the first 12 months. We cannot give any specifics now because, obviously, we still don't know when are we going to be closing, and there is still a bit of uncertainty on the closing date. But if you assume, call it, July 1, so second half of the year of 2020, you will have approximately between $0.15 and $0.20 of accretion at the current interest rates that I mentioned just a couple of minutes ago. On the synergy side, obviously, and Melissa mentioned as well during the call, we are going to start working now with eNett and Optal on what the organization is, how we are going to be working together. And obviously, we expect to get some synergies if we close on -- in the middle of 2020, you will -- we will expect to see some synergies. But as you know, one thing is to start getting the synergies. And two is when you start realizing them. But within the 24-month window, post-closing, we expect to have all the run rate synergies.

Got it. And just one quick one. Any client concentration risk in the portfolio that you're acquiring that we should be aware of?

If you look at the travel marketplace, online travel, there is concentrations in that marketplace. And our travel portfolio, when you consolidate it, will look like what you would see in the overall market.

Your next question is from the line of Darrin Peller.

Congratulations on the deal. Thinking about these businesses, are there any investments that you need to make into those businesses to kind of get them up to the WEX type of scale? And I guess are there any other key partnerships that they have in place that merge well into -- under the WEX umbrella?

From a scale perspective, so we talked about the fact that we're going to have run rate synergies. There are going to be some onetime costs that we will need to achieve that. So there -- I don't know that I would describe it as getting up to WEX standards or scale, but there's work just to do in order to make sure that we have consistency across the enterprise. And so -- and that's something that we do with any acquisition. It's just making sure they have the same systems and tools so that people can talk to each other all across the business. So there's work that has to go on that front. But I wouldn't describe it as a significant change in order to alter either the ability of the company to be a public company because eNett, in fact, was in a public company. So from a compliance standpoint, this has been regulated and operating in a compliance regulatory format for many years. So difference in some other companies that we've purchased that have been not in the position of having any type of oversight. So from a lift perspective, the lift is more around taking 3 different businesses and consolidating them together. And that just takes some work and a little bit of time. If it's like 2 years though, we'll have that done.

And I'm sorry, just a follow-up on that last question. You said the $0.15 to $0.20, if it closes on July 1, and that's exclusive of any potential synergies within that time frame?

It includes synergies.

[ On that. ]

Yes. I mean the first day we close, obviously, we're going to start working on the synergies. And you should expect now that starting day 1, as we move into the second half of 2020, there will be some synergies. What you know is that, as Melissa mentioned, we have to do all this integration. You get the synergies, but the run rate is there. The daily synergies or the monthly synergies are slowly ramping up, but there will be some synergies included in the first 6 months.

Your next question is from Andrew Jeffrey.

Just Melissa, given the nature of travel and as you mentioned, the somewhat concentrated element of the business, do you have pretty good line of sight on contract renewal? It looks like yield here is relatively consistent with your travel business today. Are there any big customer renewals that are coming up in the near term?

There's nothing that's unusual from a renewal perspective. If you look across our businesses, across their business, there's going to be some renewal process that's happening on a regular basis, but there's not anything that is imminent that would be troubling.

Okay. And just broadly, when I look at -- when you look at your B2B strategy, obviously, this is increasing travel exposure, and that's been the main thrust. Would you anticipate a move more into sort of general corporate payments and/or vertical integration into accounts payable, automation software or anything like that? Or is this a clear signal that this is where WEX wants to sort of plant its B2B flag?

It's a great question. On the B2B side, what we've talked about is we think about 4 different verticals for WEX, we think about travel as a vertical, we think of health care, we think of fleet. And then AP, that is a fourth segment. That's been an area that we have continued to grow in the company. It's still a relatively small part of the company. So I wouldn't take this as any indicator that we're not interested in doing more in the AP space. This is an indicator that this is the space we've been in, we have done well in and we want to continue to invest in. And if you look at the places that we prioritize, this really hits all 3. And that's -- so we feel good about the fact that it is going to increase the growth profile of the company, it's going to reduce the exposure that we have to fuel prices and it's going to increase our geographic diversification. Once we like this, it really hit a sweet spot for us, but we'll continue to look at all 4 of those verticals and continue to invest in them.

Your next question is from Ashish Sabadra.

Congrats on the deal. Just a quick question. I believe Travelport had embedded eNett within their Smartpoint desktop application, and that helped roll it out, especially among the smaller travel agency. So my question here was, is there a -- will there be continued partnership with the GDS provider to help further sell this into the long tail? That's one aspect. And now that eNett is not part of Travelport, is there an opportunity for you to work with other GDS providers as well to continue to pursue new customer base?

So if you look at where the predominant part of their revenue was coming from, it was coming from them directly. And so if you look at the future growth and what we believe the future growth of this business is, it is coming from the -- us and now the us combined entity, and has less to do with the relationships that they've had with Travelport. We do intend to continue, though, to have a relationship with Travelport in the future.

Okay. That's helpful. And maybe just a quick clarifying question, Roberto. Based on the valuation multiple you gave feedback, and then you get around $100 million of EBITDA in 2020, which implies roughly 50% plus margins, which is slightly higher than the margins for the -- your current travel and corporate solutions. Is that the right way to think about it, that margins are going to be higher than the segment margins?

Yes, you are correct. And I mentioned it on the call that this transaction will not only expect the revenue growth to be accretive, but also to expand our EBITDA margins on the segment.

Your next question is from the line of Trevor Williams.

Congrats on the deal. The slide with the eNett-Optal geographic mix is helpful. I'm just wondering if you could give us just what the pro forma geographic mix will be for the combined travel business.

Yes -- no. I'm going to caveat this with the fact that when we think about the geographic mix here, it's based on where the customer resides. So they're spending all around the world, but where the customer is actually originating. And so if you look at the business, the majority of our business is domiciled in the U.S., and then we have some in Europe and some in APAC. And when you combine those 2 businesses together from the company, it will increase the amount of international new business we have by about 5% at a total company basis.

Okay. That's helpful. And...

So think of it as around 20% to about 25% rough amount.

Okay. And from where are you guys, do you have customer overlap? I think at the Investor Day, you guys had talked about having around 20% of wallet share with your top 20 customers. I'm just curious so where there is overlap, what combined wallet share does it give you with those customers? And then I'm just wondering if there's any inertia there with when you put the 2 of you together, if this could help increase the wallet share beyond just what the sum of the 2 of you guys have both currently.

Yes. So if you look at the overall marketplace, last year, we talked about the market size of being $1.6 billion in terms of revenue. And we had calculated that at Investor Day from Phocuswright. So if you think of those years past, the market's grown, it's closer to about $1.8 billion in revenue, and the combination of all 3 entities would represent about 20% of the market. So when you look at the market and the market opportunity consolidated, we still feel very good about the opportunities that we have with the existing customers in -- as those existing customers continue to grow and then as we continue to add new ones. All 3 of those things are things that we think will continue to build on the growth rate.

Your next question is from the line of Timothy Chiodo.

A similar question along the lines of the Phocuswright 9% underlying market growth. I just want to dig into that a little bit more with virtual cards being, I suppose, more exposed to the merchant model relative to the agency model. And maybe if you can just give a little bit on what the relative growth rates are or maybe mix shifts taking place across merchants and agency and how that might support the growth.

Yes. So if you look at the trends that are happening within the merchant model, we think that you're going to continue to see growth in terms of the percentage of total OTA spend that's going through the merchant model on a global basis. So there's shifts that are happening. The biggest shift would be in the European marketplaces. So right now, it's about 1/3 of the market, we believe, that is the merchant model. And as you see that grow over time, we think that that's going to continue to increase.

Okay. So just to recap, roughly 1/3 of the market being merchant, and you expect that to take share within the overall travel market.

Yes.

And that's kind of your core underlying addressable market.

It is a piece of the core underlying addressable market. Not everything that we do is related to the merchant model, but it is the vast majority of it. So yes. Yes. And at the same time, when you think of the trends that we've -- that are standing behind us, we believe we're going to continue to see more movement on a global basis through the merchant model. We think you're going to continue to see spend volume increase over time, and places that you'll see more volume increases are going to be in the Asia Pac region. So the disproportionate amount of the growth will come from that region.

Your next question is from the line of Steven Wald.

So maybe just if we could come back to some of the revenue and the adjusted net income goals. To kind of finer point on it, I think we talked a little bit about the revenue. It sounds like maybe that sort of boosted you towards -- and correct me if I'm wrong, the top end of that revenue guide for the 10% to 15%. On an ANI basis, do we think in year 1, you can bump it up into that 15% to 20%? Or is that sort of a year 2 once the synergies are more fully baked in from an acquisition boost standpoint?

So this is Roberto. Let me start with the ANI. I mean at the end of the day, our long-term target on growth on ANI is 15% to 20%. And as I said today, we -- if considering that we closed the transaction in the middle of 2020, you are going to see accretion to that number. And obviously, as we get into 2021 and looking forward, obviously, the accretion that we expect from the transaction is going to be higher. So it doesn't change nor the growth profile of the corporate payments, so the corporate and travel segment of 10% to 15% and does not change our profile on the 15% to 20% long-term target growth for ANI.

Got it. Okay, fair enough. And then just maybe more housekeeping-wise. You guys talked about the sort of mid-2020 and there being -- I don't want -- I don't know if I'm mischaracterizing it as an uncertainty, but maybe you could walk us through any of the specific or unique regulators or parties you need to clear. And what the hurdle...

Yes. So think of this as going through normal regulatory approval, but this business operates all around the world. And so from a regulatory perspective, there's a number of different regions that we have to get regulatory approval. So when Roberto talked about uncertainty, it's just time uncertainty, how long does that take.

Your next question is from the line of Ryan Cary.

Just wanted to follow up on an earlier question. I'll try to ask it a slightly different way. So even with the favorable geographic mix, I would assume there is still some customer overlap. I believe in the past you've said many of the OTAs like to have multiple providers. So is there any risk now that eNett and WEX are combined, that OTAs you already have a relationship with will now look to bring in another outside provider to compete?

So we believe, combined, we actually have a more compelling offering to our customers, and that's for multiple reasons. We have an ability to share products across the portfolio. We have an ability to bridge the currencies that we're settling in across the world. And so our capability combined is much higher than it has been individually. So from a customer perspective, we think that there's just more that we can provide. On top of that, we talked about having 2 different systems. So we think that, that is an ability to offer a second system that's geographically specific that meets the customer needs, but also at the same time, being able to share best practices across the globe. This, we think, is something that's going to be really advantageous to the customers that we work for and an ability for us to focus on not just their short-term needs but their long-term strategic needs and doing more for them across their portfolio.

Makes sense. And Melissa, you touched on it a bit earlier, and I apologize if I'm beating a dead horse. But how much of the $20 billion in purchase volume is specifically from eNett? I'm just trying to get a sense of how much, if any, of the Optal business falls outside of that travel vertical.

So very little that falls out that. Think of this as 99% that's relating to land travel. High 90s.

Your next question is from the line of Pete Christiansen.

Interesting deal here. I guess post-EFS, deleveraging was more a function of EBITDA growth less so on pay -- debt paydown. Should we expect debt paydown to be a larger component of delevering here? And then just following up on Darrin's question earlier as it relates to M&A and corporate payments. Does this put off additional M&A activity for the time being until we get to more reasonable leverage levels to be more involved in corporate payments M&A?

So I will start with your first question, and then Melissa will chime in as well. So if you recall, when we closed EFS at the time of the transaction, we were over 4.7x leverage. And we use all the cash flow and all the EBITDA growth to delever quickly. At the time, the way we were delevering was 0.5 turn to 0.75 of a turn. And what I said today is that because this transaction generates a significant amount of cash flow, we expect overall at WEX, to be able to delever now between 0.5 turn and a whole turn per year. So if we expect to close no higher than the 4.5x, at the time of closing, as you can -- I mean, you can imagine that between 9 months and 18 months after closing the transaction, we are going to be within our long-term range of 2.5 to 3.5x. And obviously, in this time period, we will be able not to get into M&A potential opportunities as well. So it's increasing our profile on -- from a free cash flow point of view significantly.

And what I'd add to that is when we think about M&A, we went through a lot of work in the course of the last year to fit through the transactions we wanted to execute on. So there's always going to be a pipeline of activity that's happening through the organization as well as proactively going out in some marketplace and making sure we're building relationships to bring in transactions. So that work will continue. The -- when we go through and make a choice whether or not we're going to do something, we go through those criteria that we talked about earlier, plus financial criteria, which is largely based on the return risk-adjusted of the asset that we're looking at. And then the last thing that we look at is capacity. Can we, as an organization, absorb and effectively do what we have in our plate? And so I think about the future year as being in that same category of going through that same criteria, making sure that we're proactively in the marketplace that we're funding through transaction flow. And then when the timing is right, being in position to pull the trigger on the acquisitions we want to do. So I don't think the...

That's helpful.

And don't forget, if you look at our past, we've been really active.

That's helpful. And then I guess, looking longer term, 5, 10 years out, I think there's some potential technology risk as it relates to new payment standards coming on. Just wondering if you can provide some thoughts on your comfortability and the ability to navigate that and maintain a strong product presence in virtual cards specifically.

Yes. I think technology and product as being a strength of ours. So when we are out meeting with customers, we're talking about not just what they think they need, but what problems do they have that we can bring unique solutions to. So we do believe that we're very well positioned because of relationships that we have to make sure that we are meeting the needs in the marketplace. So I feel really good about not just our technology chops, but our relationship chops to be able to define those 2 things and to evolve the business as the market changes.

And just finally, is this processing volume handled by eNett? Or is this something that you plan to in-house like you've been doing so far? Just trying to understand that dynamic. And now I'll jump in the queue.

Yes. The processing volume is largely being handled internally by them. Yes.

Your next question is from the line of Dave Koning.

Congrats. And I guess I just have 2 financial questions. First of all, you mentioned a couple of times that the cash flow dynamics are really good. And let's just say you did adjusted net income of $40 million in that business, let's just say, in the first year. Is there a reason that cash flow is actually better than that? I guess I'm just wondering, is it an over 100% cash conversion business? And if so, why?

So the way we see the free cash flow, the way I know that internally, we go through the cash flow generation, it's related to EBITDA. And what I would say to you is that the conversion of a free cash flow of this transaction versus the EBITDA. So if you take $100 million, for example, the conversion to free cash flow is going to be higher than 85%. And therefore, when you put it together within the WEX, as I said, it allows us to delever faster than we used to delever before. So obviously, as this asset continue to grow, the weight now of the new asset within the WEX family will increase the profile of the free cash flow.

So 85% -- so $85 million of cash flow, which is like $2 per share? That's...

I gave you an example of $100 million today, the business on its own, if you take $100 million as an example of EBITDA, it will convert $85 million into free cash flow. Now we are buying the asset. And now I have, obviously, debt, and I need to take into consideration the financing interest, but then the company per se generates significant amount of cash flow.

Yes. Okay. That all makes sense. And then the second question, just tax rate. Because this is so heavily international based, how does this impact -- I would imagine the tax rate standalone is much lower [indiscernible] company.

I didn't hear your last part. But what I believe you asked is how it's impacting the overall tax rate for WEX going forward. So yes, what I would say to you, yes. So the tax rate, obviously, these businesses operate internationally. And the tax rate is similar to the one we have today. As we integrate the business within WEX, it slightly will increase the overall tax rate, not materially. I mean this year, we were around between 24.5% and 25.5%. It probably will increase between 0.5 point and 1 point as we move forward. And this is because of the new tax reform that the foreign earnings, you need to consolidate them into -- within the U.S. and then the tax rate will have a small increase, but it's not going to be significant.

Your last question is from the line of David Eller.

Just wanted to go back to one of the follow-up -- the prior questions. Did you say that M&A would be on hold until you get to that 2.5 to 3x? Or were you saying it would not? And then in terms of the EBITDA, it looks like the 4.5x net leverage that you expect to close. So would that put pro forma run rate EBITDA kind of in the high 800 level? Am I calculating that correctly?

So let us start with the first one. You want...

Yes, let me do the first one. [ You do the second ]. Yes. So I would never say that M&A is on hold because there's always activity that happens in the background. That activity may take years to come to fruition, but there's always going to be a buzz of activity that's happening. When we're at higher leverage ratios, and you saw this when we did the EFS transaction, the hurdle to deliver something gets higher. And as we delever, then it just enables us to do more, largely because not just the financial constraints but we look at this from an organizational capacity standpoint and what can we actually do effectively across the enterprise. So our primary focus will be delevering, but there will continue to be work that's happening in the background. And to the extent that we saw something that meets all of our criteria and hit all of our hurdle rates, that would be something we would be really actively considering.

Yes. And just to give you some numbers on what Melissa said. So we closed EFS up 4.7. We spend the following 18, 24 months to delever, we went down to 3.1. So we were, for a couple of quarters, within the range. And then we have been active now the last 12 to 18 months on M&A, went up to 4x and we have been delevering all year. And now we are clear, announcing the transaction, and we expect to close just below the 4.5x. And as we said, delever quickly back to our long-term range. And then you asked about what was the -- what is the pro forma EBITDA of the combined entities? So obviously, we're not going to give you what the number is of the acquired transaction. We gave you the multiple that we believe we are paying as you look on 2020 forward-adjusted EBITDA. But if you take the 4.5x and you take our debt of today, plus what we expect to add in that and you take the 4.5, you will get to an EBITDA number that is slightly higher than what you said.

Got it. And then, Roberto, you talked a little bit about how you plan to finance the debt. Can you talk a little bit more just at a high level about how you think about secured versus unsecured debt? Or whether you plan to refinance any existing debt or just kind of layer this on top of that?

Yes. So we got -- as you know, we got the commitment papers now from our bank group. Obviously, now we have time as we go through the regulatory process and the approval. And I think in the next few weeks and couple of months, we are going to see what is the best cost for the company. You know that the market moves. And depending on the best condition, we could look at into term A, term B revolver or some unsecured financing. It's something that we are exploring already. And I think when we were closer to the transaction date, we will obviously inform on what is the best mix of a financing instrument.

There are no further questions. Presenters, please continue.

Thank you very much. We look forward to speaking with you soon when we release our Q4 earnings. And hope everyone has a great day, and thanks for joining us again on such short notice.

This concludes today's conference call. Thank you for attending. You may now disconnect.