Ladies and gentlemen, thank you for standing by, and welcome to the acquisition of eNett and Optal by WEX. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. 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 31 December 2018, and filed with the SEC on 18 March 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 three. 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 two 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 costs to achieve the synergies. We anticipate the transaction will close mid-year 2020, subject to regulatory approvals and other customary closing conditions.
Moving on to slide four. 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 of what we have historically called virtual cards, credit card processing, Electronic 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 multi-currency 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-$160 million, subject to any adjustments to conform to US 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 payments 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. Third, to expand and diversify geographically. This acquisition meets all three 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 exposures at a high-growth travel segment. 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's going to provide detail on the pro forma company. Roberto?
Thank you, Melissa. Good morning, everyone. Let's just start on slide number six, 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 number seven 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 two 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 deliver our balance sheet. Based on the committed financing, we expect the leverage ratio to be no more than 4.5 times upon closing.
Going forward, we expect to deliver between half a turn and a full turn per year. This will put us back within our long-term target leverage range of 2.5 to 3.5 times between nine 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 costs to achieve them. We expect to capture the synergies within 24 months following the close of the transaction. With that, I would like to turn the call back to Melissa for some final thoughts.
Thanks, Roberto. In summary, slide eight 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 footprints. 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 costs 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.
At this time, I would like to remind everyone, in order to ask a question, simply press star then the number 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. Your first question is from Bob Napoli. Please ask your question.
Good morning.
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 revenue's apples to oranges and you're using a net revenue. The EBITDA, could you give some thoughts on valuation relative to what they reported, what the EBITDA might be?
Bob, good morning. This is Roberto. Obviously, we are not going to get specifics on EBITDA for the combined entities at this point. 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 13.9 times.
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.
I think you share some customers and what do they give you? What does Optal bring to the table? What additional, other than geographies, do they give you? Are there revenue synergies? They were known to be aggressive on pricing. Does this take some of the pricing pressure out of the industry?
I think there's a bunch of things that I can unpack from what you just asked.
Yeah, great.
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. 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. That's a product that we're going to be able to allow our customer base to have access to. It gives us the functionality that we have, the access to the credit facility and the banks that we own, as well as new products that eNett and Optal bring to the table.
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, and it sits there. eNett is the company that's been doing sales and marketing and a lot of the product development work. They have coexisted even though they have separate ownership structures.
On the revenue synergies.
Yeah. We have not historically modeled in revenue synergies when we think about transactions. At the same time, we've had a really good history of being able to take one plus one and make it equal sort of three. Most of that has been on the revenue side. We do believe that there is opportunity here when you look at the two companies together. That is not the basis that we used when we valued this transaction.
Thank you. Appreciate it.
Your next question is from Ramsey El-Assal. Sir, your line is open.
Hi, thanks for taking my question. 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? Historically, you'd kind of mentioned that you were content to play in your three primary business lines, but could this deal be sort of the thin end of the wedge to pursuing some other sectors in the payments industry?
Yeah. 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. When we look at potential revenue synergies and product synergies, it's something that we will continue to explore. Think of that as the kind of the minor part of when we look at this transaction, with 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 at across our global portfolio.
Okay. Just on the company's growth rate. Historically, it seems to 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 it historical? Was there an organic contribution? Just a little commentary on the trajectory of growth would be helpful.
Some of it is the law of larger numbers. If you look at the growth profile of the company, we feel really good about the growth profile. I actually also like, if you look at the regions that they are heavy in, those are regions that are growing faster and where you're seeing more migration also to the merchant model. There's a lot of really good benefits of being in the regions that eNett and Optal have operated in and having an emphasis there, which was a big part of our deal thesis. You start with really good macro trends that are happening.
When we gave you the forward look, it was looking at this on a combined basis of what we think the combined business will do. We talked about a combined staying in that same range that we had given out previously in Investor Day for the segment.
Okay. Just sneaking a quick housekeeping one in, what is the interest rate on the new debt you're raising? Then I'll pop back in the queue.
Hi, this is Roberto. Good morning. What we have modeled as interest rate for this transaction, 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. Obviously, now, I would like to point out that each of the rates are subject to change as we move to the closing period.
Perfect. Thanks so much.
Of course.
Your next question is from the line of Sanjay Sakhrani. Sir, your line is open.
Hi. Thanks. This is Vasu Govil for Sanjay. Just wanted to follow up on that question on revenue growth. In longer term, you've said it's 10%-15%, which is in line with the travel vertical. Should we expect sort of a higher growth rate in the medium term? 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 one.
Let's just start with the revenue growth. I think Melissa has been clear. eNett and Optal have been growing really very strong. We posted a couple of KPIs for the last three years, where the 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 the segment are not changing. We are adding a significant amount of extra revenue, so the base is significantly bigger. When we look on our long term, we still believe that the long-term range of 10%-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 small pop-up. We don't believe now that this is going to change our profile on the long term.
Your second question was related to accretion?
Yeah, the margin profile and the accretion in year one, and if you're assuming any synergies, cost synergies in year one as well in the EPS accretion.
We said today that we expect Adjusted Net Income EPS to be accretive within the first 12 months. We have not given any specifics, 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. If you assume, call it 1 July , so H2 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. Obviously, we expect to get some synergies if we close in the middle of 2020. We will expect to see some synergies.
As you know, one thing is to start getting the synergies, and two is when you start realizing them. Within the 24-month window post-closing, we expect to have all the run rate synergies.
Got it. Thank you very much. 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 concentration in that marketplace. Our travel portfolio, when you consolidate it, will look like what you would see in the overall market.
Got it. Thank you very much.
Your next question is from the line of Darrin Peller. Sir, your line is open.
Hey, good morning, guys. Congratulations on the deal. In 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? I guess, are there any other key partnerships that they have in place that merge well under the WEX umbrella?
From a scale perspective, we talked about the fact that we're going to have run rate synergies. There are going to be some one-time costs that we'll need to achieve that. I don't know that I would describe it as getting up to WEX standards or scale, there's work just to do in order to make sure that we have consistency across the enterprise. 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. There's work that has to go on that front. 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 sat within a public company.
From a compliance standpoint, this has been regulated and operating in a compliance regulatory format for many years. Different than some other companies that we've purchased that have been not in the position of having any type of oversight. From a lift perspective, the lift is more around taking three different businesses and consolidating them together. That just takes work and a little bit of time. By two years, though, we'll have that done.
I'm sorry, just to follow up on that last question. You said that $0.15-$0.20 if it closes on 1 July, and that's exclusive of any potential synergies within that time frame?
It includes synergies. Yes. The first day we close, obviously we are going to start working on the synergies. You should expect, that starting day one, as we move into the H2 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. There will be some synergies included in the first six months.
All right. Congratulations again.
Thank you.
Thank you.
Your next question is from Andrew Jeffrey. Sir, your line is open.
Hi. Good morning. Appreciate you taking the question. 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 renewals? 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 business, if you look across their business, there's going to be some renewal process that's happening on a regular basis. There's not anything that is imminent that would be troubling.
Okay. Just broadly, 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 general corporate payments and/or vertical integration into accounts payable, automation software, or anything like that? Is this a clear signal that this is where WEX wants to plant its B2B flag?
That's a great question. On the B2B side, what we've talked about is we think about four different verticals for WEX. We think about travel as a vertical. We think of healthcare. We think of fleet. Then AP, so just as 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. 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. If you look at the places that we prioritize, this really hits all three. We feel good about the fact that it is going to increase the gross profit of the company.
It's going to reduce the exposure that we have to fuel prices, it's going to increase our geographic diversification. Once we like this, it really hit a sweet spot for us. We'll continue to look at all four of those verticals and continue to invest in them.
Okay. Appreciate it. Thank you.
Your next question is from Ashish Sabadra. Your line is open.
Thanks for taking my question, and 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. My question here was, will there be a continued partnership with the GDS provider to help further sell this into the long tail? That's one aspect. 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?
If you look at where the predominant part of their revenue was coming from, it was coming from them directly. If you look at the future growth and what we believe the future growth of this business is, it is coming from us, and now the us combined entity, and has less to do with the relationship that they've had with Travelport. We do intend to continue, though, to have a relationship with Travelport in the future.
Okay. No, that's helpful. Maybe just a quick clarifying question, Roberto. Based on the valuation multiple you gave, if you back it and you get around $100 million of EBITDA in 2020, which implies roughly 50%-plus margins, just slightly higher than the margins for your current travel and corporate solution. Is that the right way to think about it, that margins are going to be higher than the segment margins?
Yeah, you are correct. I mentioned it on the call that this transaction, we not only expect the revenue growth to be accretive, but also to expand our EBITDA margins on the segment.
Thank you.
Yeah.
Your next question is from the line of Trevor Williams. Your line is open.
Hi. Thanks, guys. Good morning, and 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.
Yeah. Now, 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. They're spending all around the world, but where the customer is actually originating. If you look at the business, the majority of our business is domiciled in the U.S. We have some in Europe and some in APAC. When you combine those two businesses together, from the company, it will increase the amount of international new business we have by about 5% as a total company basis.
Okay, that's helpful.
Think of it as around 20%-25%, rough math.
Okay. Thank you. From where you guys do 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 to where there is overlap, what combined wallet share does it give you with those customers? I'm just wondering if there's any inertia there with when you put the two of you together, if this could help increase the wallet share beyond just what the sum of the two of you guys have both currently. Thanks.
Yes. If you look at the overall marketplace, last year, we talked about the market size of being $1.6 billion in terms of revenue. We had calculated that at Investor Day from Phocuswright. If you think of those years past, market's grown, it's closer to about $1.8 billion in revenue. The combination of all three entities would represent about 20% of the market. When you look at the market and the market opportunity consolidated, we still feel very good about the opportunity that we have with existing customers and as those existing customers continue to grow, and then as we continue to add new ones. All three of those things are things that we think will continue to build on the growth rate.
Okay, perfect. Thanks very much.
Your next question is from the line of [inaudible] . Your line is open.
Great. Thanks for taking my question. 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. Maybe you can just give a little bit on what the relative growth rates are or maybe mix shifts taking place across merchant and agency and how that might support the growth. Thanks.
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. There's shifts that are happening. The biggest shift would be in the European marketplaces. Right now it's about a third of the market, we believe, that is the merchant model. As you see that grow over time, we think that that's going to continue to increase.
Okay. Just to recap, roughly 1/3 of the market being merchant, you expect that to take share within the overall travel market.
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. Yes. At the same time, if you think of the trends that are standing behind us, we believe you're going to continue to see more movement on a global basis in the merchant model. We think you're going to continue to see spend volume increase over time. The places that you'll see more volume increases are going to be in the Asia Pac region. A disproportionate amount of the growth will come from that region.
Great. Okay, that makes good sense. Thanks a lot.
Your next question is from the line of Steven Wald. Your line is open.
Hey, good morning. Maybe just if we could come back to some of the revenue and the Adjusted Net Income goals. To kind of find your point on it, I think we talked a little bit about the revenue. It sounds like maybe this sort of boosts you towards, and correct me if I'm wrong, the top end of that revenue guide for the 10-15. On an ANI basis, do we think in year one you can bump it up into that 15 to 20, or is that sort of a year two once the synergies are more fully baked in from an acquisition boost standpoint?
This is Roberto. Let me start with the ANI. At the end of the day, our long-term target on growth on ANI is 15%-20%. As I said today, if considering that we close the transaction in the middle of 2020, you are going to see accretion to that number. Obviously, as we get into 2021 and looking forward, obviously the accretion that we expect now from the transaction is going to be higher. It doesn't change nor the growth profile of the corporate payments or the corporate and travel segment of 10%-15%, and does not change our profile on the 15%-20% long-term target growth for ANI.
Got it. Okay, fair enough. Just maybe more housekeeping-wise, you guys talked about the mid-2020 and there being, 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.
Yes. Think of this as going through normal regulatory approval. This business operates all around the world. From a regulatory perspective, there's a number of different regions that we have to go through regulatory approval. 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, your line is open.
Good morning, guys. Just wanted to follow up on an earlier question. I'll try to ask it a slightly different way. Even with the favorable geographic mix, I would assume there is still some customer overlap. I believe in the past you said many of the OTAs like to have multiple providers. Is there any risk that 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?
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. Our capability combined is much higher than it has been individually. From a customer perspective, we think that there's just more that we can provide. On top of that, we talked about having two different systems. We think that of 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 portfolios.
Makes sense. Melissa, you touched on it a bit earlier, I apologize if I'm beating a dead horse, 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.
Very little that falls outside. Think of this as 99% that's relating to travel. High nineties.
Perfect. Thank you so much.
Your next question is from the line of Pete Christiansen. Your line is open.
Good morning. Thanks for taking my question. Interesting deal here. I guess post EFS deliveraging was more a function of EBITDA growth, less so on debt paydown. Should we expect debt paydown to be a larger component of delivering here? Just following up on Darrin's question earlier as it relates to M&A out in 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?
I will start with your first question, and then Melissa will chime in as well. If you recall, when we closed EFS at the time of the transaction, we were over 4.7 times leverage, and we used all the cash flow and all the EBITDA growth to deliver quickly. At the time, the way we were delivering was half a turn to three-quarters of a turn. What I said today is that because this transaction generates a significant amount of cash flow, we expect overall as WEX to be able to deliver now between half a turn and a full turn per year.
If we expect to close no higher than the 4.5 times at the time of closing, as you can imagine that between nine months and 18 months after closing the transaction, we are going to be within our long-term range of 2.5 to 3.5 times. Obviously in this time period, we will be able now to get into M&A potential opportunities as well. It's increasing our profile from a free cash flow point of view significantly.
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 ferret through the transactions we wanted to execute on. There's always going to be a pipeline of activity that's happening through the organization, as well as proactively going out into the marketplace and making sure we're building relationships to bring in transactions. That work will continue. 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. The last thing that we look at is capacity. Can we as an organization absorb and effectively do what we have on our plate?
I'd think about the future years 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.
That's helpful.
I don't think that if you look at our past, we've been really active.
That's helpful. Then I guess looking longer term, five, 10 years out, I think there's some potential technology risk as it relates to new payment standards coming on. Just wondering if you could provide some thoughts on your comfortability and the ability to navigate that and maintain a strong product presence in virtual cards specifically.
Yeah, I think technology and product as being a strength of ours. 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. We do believe that we're very well-positioned because of the relationships that we have to make sure that we are meeting the needs in the market side. I feel really good about not just our technology chops, but our relationship chops, to be able to combine those two things and to evolve the business as the market changes.
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? I'm just trying to understand that dynamic, and I'll jump into queue. Thanks.
Yeah. The processing volume is largely being handled internally by them. Yes.
Okay. Thank you.
Your next question is from the line of Dave Koning. Your line is open.
Oh, hey, guys. Thanks and congrats. I guess I just have two financial questions. First of all, you mentioned a couple times that the cash flow dynamics are really good. Let's just say you did adjust to that 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?
The way we see the free cash flow, the way now that internally we go through the cash flow generation, it's related to EBITDA. What I would say to you is that the conversion of a free cash flow of this transaction, versus the EBITDA is, if you take $100 million, for example, the conversion to free cash flow is going to be higher than 85%. When you put it together within the WEX, as I said, it allows us to deliver faster than we used to deliver before. Obviously, as these assets continue to grow, the weight now of the new asset within the WEX family will increase the profile of the free cash flow.
85%, so $85 million of cash flow, which is like $2 per share.
I gave you an example of 100 today. The business on its own, if you take $100 million as an example of EBITDA, it will convert 85 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. The company per se, generates a significant amount of cash flow.
Yeah. Okay. That all makes sense. The second question, just tax rate, because this is so heavily international-based, how does this impact? I would imagine the tax rate standalone of this business is much lower.
I didn't hear your last part, but what I believe you ask is how it impacts now the overall tax rate for WEX going forward.
Yeah.
What I would say to you, 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 half a point and one point as we move forward. This is because of the new tax reform that the foreign earnings, you need to consolidate them into within the U.S., the tax rate will have a small increase. It's not going to be significant.
Okay, great. Thank you.
Your last question is from the line of David Eller. Sir, your line is open.
Hey, good morning. Just wanted to go back to one of the prior questions. Did you say that M&A would be on hold until you get to that 2.5x-3x, or were you saying it would not? In terms of the EBITDA, it looks like the 4.5x net leverage that you expect at close. Would that put pro forma run rate EBITDA kind of in the high 800 level? Am I calculating that correctly?
Let's start with the first one.
Yeah, let me do the first one. 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. There's always going to be a buzz of activity that's happening. When we're at higher levered ratios, and we saw this when we did the EFS transaction, the hurdle to deliver something gets higher. As we deliver, 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. Our primary focus will be delivering, but there will continue to be work that's happening in the background.
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.
Yeah. Just to give you some numbers now on what Melissa said. We closed EFS at 4.7x. We spent the following 18, 24 months to deliver. We went down to 3.1x. We were for a couple of quarters within the range. We have been active now the last 12 to 18 months on M&A, went up to 4x. We have been delivering all year, and now we are here announcing the transaction, and we expect to close just below the 4.5x. As we said, now, deliver quickly back to our long-term range. You ask about what is the pro forma EBITDA of the combined entities? Obviously, we are 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 a 2024 Adjusted EBITDA. If you take the 4.5x and you take our debt of today, plus what we expect to add in debt, and you take the 4.5, you will get to an EBITDA number that is slightly higher than what you said.
Got it. 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?
As you know, we got the commitment papers from our bank group. Obviously, now we have time as we go through the regulatory process and the approval. I think, within the next few weeks and couple of months, we are going to see what is the best course for the company. You know that the market moves, and depending on the best conditions, we could look at into Term Loan A, Term Loan B, revolver or some unsecured financing. It's something that we are exploring already. I think when we are closer to the transaction date, we will obviously inform on what is the best mix of financing instruments.
Got it. Thank you for taking the questions.
Thank you.
I'm sorry. There are no further questions. Presenters, please continue.
Thank you very much. We'll 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.