Why Edenred Ignores McKinsey’s Advice
And Why That Might Be Smart
Hello everyone, welcome to this follow-up on our first article about Edenred (make sure you read it before diving into this one). In this second part, we’ll take a closer look at Edenred’s acquisitions. We'll outline the key acquisitions Edenred has made over the years, the goals behind them, and, ultimately, whether they’ve achieved these goals.
Acquisitions are a major component of Edenred’s FCF allocation strategy. When we first looked into this, we weren’t exactly thrilled. We've both learned over time that acquisitions are not usually the most efficient way to drive growth. McKinsey’s well-known book, Valuation: Measuring and Managing the Value of Companies, ranks growth strategies by effectiveness, stating: “Growth from new products creates the most value, while growth from acquisitions creates the least value.”
Here’s the order McKinsey gives in terms of value creation:
I. New products
II. Expanding existing business
III. Increasing share in a growing market
IV. Competing for share in a stable market
V. Acquisitions
The fact that we’re still here writing about Edenred might suggest that we haven’t taken this advice to heart. The reason? McKinsey’s advice applies to the average company, but some businesses have honed the art of acquisitions and excel at it (take Constellation Software as an example). Given that Edenred has completed around 30 acquisitions since their IPO, all while maintaining a high ROIC (more on this in our valuation, coming soon), we had a hunch they might just be in that elite group of acquisition specialists. Let’s find out!
A Look at Edenred's Acquisition Trail
As previously mentioned, Edenred has made around 30 acquisitions since its IPO. Most of these, however, are small acquisitions that consume an insignificant portion of free cash flow. Recent examples in 2024 include Spirii, a Danish provider of electric vehicle (EV) charging platform solutions, and RB, a platform for employee transport benefits in Brazil. The purpose of these smaller acquisitions will be further explained below. In this section, we will focus primarily on the more significant acquisitions Edenred has made in recent years, starting with the largest one to date.
1. Reward Gateway
In May 2023, Edenred acquired Reward Gateway, a leading employee engagement platform, for approximately €1.3 billion. Reward Gateway, based in the UK with operations in the US and Australia, enables Edenred to strengthen its Employee Benefits offering. The acquisition supports Edenred’s Beyond22-25 strategy by integrating engagement tools like online discounts, wellness programs, and recognition systems, making it a valuable cross-sell opportunity for meal and food vouchers and other benefits.
2. Repom (Brazil)
Edenred acquired a 62% stake in Repom, Brazil’s leader in expense management for independent truckers, in 2013 for €53 million. Repom’s preloaded card services covered all trucker expenses, such as fuel, tolls, and meals, positioning Edenred as the only provider in Brazil to cover all segments of the road transport sector. This acquisition enhanced Edenred’s fleet management capabilities in Brazil, a key market for mobility solutions, significantly contributing to its subsequent growth.
3. Union Tank Eckstein (UTA)
In 2015, Edenred acquired a 34% stake in UTA, a prominent European provider of expense management solutions for heavy vehicles, for €150 million. Over the years, Edenred gradually increased its stake, achieving full ownership by 2020. UTA’s extensive network across Europe has been crucial in bolstering Edenred’s mobility offerings, with a notable expansion in clients and service stations since acquisition. UTA’s focus on sustainable solutions, such as emission management and electric vehicle support, has positioned Edenred as a significant mobility provider in Europe.
4. Ticket Log / Embratec (Brazil)
Through a joint venture with Embratec in 2016, Edenred acquired Ticket Log, one of Brazil’s top mobility and fleet solution providers. This merger nearly doubled Edenred’s fuel card business in Brazil, increasing its market share to ~18% and positioning it as the #1 provider for light vehicles and #2 for heavy vehicles. Since 2016, Ticket Log has tripled Edenred’s mobility revenue in Brazil and solidified its standing as a leading provider of mobility solutions in Latin America.
5. Corporate Spending Innovations (CSI)
In 2019, Edenred entered the Corporate Payment Solutions (CPS) market through the acquisition of CSI for ~$600 million. CSI, based in the US, provides corporate payment solutions like virtual credit cards and payment automation. Although CSI’s growth faced challenges due to the pandemic’s impact on its core sectors, such as hospitality and media, it continues to grow, now contributing ~€100 million in revenue as of 2022. CPS aligns with Edenred’s focus on scalable, recurring revenue streams and offers opportunities for digital innovation in business payments.
The Strategic Intent of Edenred’s Acquisition Path
Now, the question remains: what is Edenred hoping to achieve with all these acquisitions? Before we dig into that, let’s briefly review the different types of successful acquisitions.
How Do Acquisitions Create Value?
Acquisitions come in all shapes and sizes, but some strategies consistently deliver the best results. One popular approach is Improving the Target’s Performance. In this strategy, a company acquires another to enhance its operational efficiency and profitability—usually by reducing costs and boosting margins. This method is especially common in the private equity world, where companies buy, optimize, and then resell to increase value.
Another smart move is Consolidating to Reduce Industry Overcapacity. As sectors mature, they often face an oversupply problem. Through acquisitions, companies can close down less productive segments, which is hard to do without consolidation. The outcome? A more efficient industry with fewer underperforming units dragging down profitability.
Acquisitions can also be a fast lane to Accelerate Market Access for Products. Large companies often acquire smaller, innovative players to get their products in front of a wider audience more quickly. This helps them capture market share and deliver products faster to consumers, which is challenging for smaller companies with limited resources.
Some companies choose to acquire Skills or Technologies Faster and Cheaper than developing them in-house. Rather than spending years on R&D, they purchase a company that already possesses the technology they need. This saves both time and costs and prevents competitors from gaining access to the same technology.
We also see companies leveraging Industry-Specific Scalability. This can be hugely valuable when two companies can share costs, such as joint purchasing or platform sharing. When the acquisition target isn’t yet optimized for scale, there’s significant potential for gains that neither company could achieve alone.
Finally, there’s Picking Winners Early and Supporting Their Growth. This strategy focuses on spotting promising companies or sectors early and helping them reach their full potential. Johnson & Johnson is a great example, having invested in DePuy early in the medical devices field and helping to accelerate its growth.
While these six strategies are often successful, they aren’t the only ones out there. In fact, one of Edenred’s primary approaches doesn’t quite fit in these categories: the Roll-Up Strategy. This approach consolidates highly fragmented markets where competitors are usually too small to achieve economies of scale. When effective, grouped businesses can achieve substantial cost savings and higher revenues than they could independently. But here’s the catch: as competitors start to catch on, acquisition prices can rise, making it harder to maintain an advantage.
With the basics of these strategies in mind, we’re all set to dive into what Edenred’s approach is all about and see what makes it unique.
Edenred's Approach to Acquisitions
The Benefits and Engagement Divison
If you’ve read our previous article on Edenred, you’ll know that Network Effects and Economies of Scale are their primary moats. For their Benefits and Engagement division, the value of Edenred’s products and services largely comes from the high number of clients (employers/employees) and partners (stores accepting their products) using their solutions. Thanks to the presence of network effects in this sector, it’s challenging for competitors to efficiently and quickly gain market share in new markets. Furthermore, Edenred’s margins grow faster than costs as revenue increases, since their established platform requires minimal incremental costs to support revenue growth. To fuel growth, Edenred leverages a variation of the Roll-Up Strategy and Industry-Specific Scalability.
For instance, they acquired Barclay Vouchers to establish themselves in the Japanese market in 2012, where they hadn’t been active before. This acquisition gave them access to over 30,000 affiliates across Japan, reinforcing their strategic expansion in the Asia-Pacific region.
ComproCard is a similar company to Barclay Vouchers but based in Brazil. Unlike Japan, Edenred was already a major player in Brazil; the ComproCard acquisition was primarily aimed at strengthening their network and boosting market share in this high-growth region.
The acquisition of Reward Gateway was different—it wasn’t solely about expanding their network. A key goal was to integrate Reward Gateway’s products, such as online discounts, wellness programs, and recognition systems, into Edenred’s existing network. This approach allows Edenred to generate additional revenue from their existing clients, showcasing their Accelerate Market Access for Products strategy. By bringing Reward Gateway’s products into their established client base, Edenred hopes to achieve accelerated growth through this expanded offering.
Mobility Solutions
In Edenred’s Mobility Solutions division, we see a similar approach to that in their Benefits and Engagement division. The acquisitions of UTA, Ticket Log, and Repom were all aimed at strengthening Edenred’s existing networks—Ticket Log and Repom in Brazil and UTA across the EU—while expanding their product and service offerings.
However, a new strategy also emerges in this segment. Take, for example, the acquisition of Spirii, a seemingly minor acquisition of the Danish provider specializing in electric vehicle (EV) charging platform solutions. Edenred acquired Spirii to enhance its EV charging ecosystem. Spirii’s proprietary software offers a comprehensive EV charging management platform, an intuitive app for driver access, and an all-in-one infrastructure management solution. This acquisition significantly reinforces Edenred’s existing network of 612,000 charging points across Europe, advancing their position in the electric and hybrid vehicle charging market.
This is a clear example of an acquisition designed to Acquire Skills or Technologies Faster and Cheaper than developing them in-house, allowing Edenred to rapidly scale their capabilities in this growing market.
As you may have noticed, we haven’t yet discussed one major acquisition: CSI. This is because CSI falls into Edenred’s “Complementary Solutions” category. For this segment, Edenred primarily employs the Accelerate Market Access for Products strategy. With this category, Edenred aims to diversify its recurring revenues, ideally focusing on streams that are less impacted by regulation, unlike the Benefits and Engagement division.
Are Edenred’s Acquisitions Paying Off?
We've arrived at the main question of this article: is this approach actually a good one?
Although acquisitions are often criticized as a poor method for growth, we have to admit that Edenred has little choice but to pursue them. In the sectors where Edenred operates, having a vast network of partners is crucial for success, and it’s simply easier to acquire this network than to build it from scratch. Building such a network takes years, and it’s debatable whether it would even be more efficient. So, we can certainly understand the rationale behind Edenred’s acquisition strategy.
However, this doesn’t mean that all acquisitions are necessarily good. Overpaying for acquisitions can destroy value, even with the right strategy in place. That said, we’re inclined to believe this isn’t the case with Edenred. As previously mentioned—and as we’ll explore more thoroughly in our next article on Edenred—the company’s Return on Invested Capital (ROIC) is notably above average, although this figure is positively influenced by the growth of Edenred’s existing businesses.
Another indicator that Edenred is paying fair prices is the relatively low goodwill recorded on its balance sheet. As shown below, goodwill as a percentage of the balance sheet has remained stable between 14% and 18%, even after the recent large acquisition of Reward Gateway. As long as this remains below 25%, we don’t foresee any issues, though close monitoring is advisable for shareholders. And of course we could be wrong.
An additional argument is that Edenred’s EBIT margins have been steadily increasing over the past 10 years. This suggests that Edenred has successfully integrated new products and services into its existing platform, with the added revenues contributing to margin growth. But more on the numbers in our next article.
As a closing note, we’d like to highlight the potential risks. Acquisitions remain a tricky business, and a single poor acquisition can seriously impact financial health. Just because Edenred appears to excel at acquisitions now doesn’t mean this will always be the case. Another point of caution for Edenred is the increasing size of the company itself. With growth, we’ve noticed that the acquisition multiple for Reward Gateway was notably higher than previous deals. This could be a one-off, but it might also signal that acquisition targets are now less likely to underestimate Edenred and may push harder to maximize their sale price.
This was the second part of our deep dive on Edenred. We'll wrap up this research with a final part, set to be published by the end of the week. Hope you enjoyed it, and see you soon!
Please note: This article includes a disclaimer regarding investment advice.