• We believe the regulatory headwinds are largely behind us, and the remaining business has lower regulatory risk going forward than investors appreciate  

  • Italy and Brazil had unique market dynamics which we think made them more prone for regulatory intervention  

    • Italy and Brazil are Edenred's only notable markets where corporate commission rates had gone negative. When corporate commissions go negative, the meal voucher companies need to charge merchants significantly more to maintain the same net take-rate. This dynamic pushed merchant fees into the teens in both Italy and Brazil, which attracted political attention and made government intervention a logical outcome  

    • In other geographies, corporate commissions remain positive and merchant commissions are in the mid-single digits. We think this is a much more balanced and sustainable fee structure that is far less likely to attract regulatory scrutiny 

  • Pro forma for both the Italian and Brazilian regulatory changes, meal as a whole represents ~40% of EBITDA and no individual country represents more than 10% of consolidated EBITDA 

    • While the Italian meal business remains important for Edenred (9% of EBITDA PF for regulation), the Brazilian one does not (2% of EBITDA PF for regulation) and we view the Brazilian regulation as much more negative than the Italian one 

      • Brazil had additional negative regulatory elements beyond merchant fee caps such as interoperability requirements and settlement period changes 

      • In Italy, right after regulating the cap on merchant fees, the country increased the face value limit of the meal vouchers by 25%, from €8 to €10, signaling that their intervention was not to limit the meal voucher program or the companies that administer it but rather target a specific imbalance between merchant fees and corporate commissions  

    • The Benefits & Engagement business beyond meal, ~30% of consolidated EBITDA, carries structurally lower regulatory risk than meal because the markets are more fragmented and merchants are still in the early part of the adoption S-curve. They're excited about incremental volumes rather than focused on fee levels 

• High quality business with structural competitive advantages  

  • High barriers to entry via closed-loop network effects and oligopolistic market structures  

    • The reason these benefit programs operate on closed-loop networks is because the government provides tax-efficient treatment in exchange for the ability to track where and what the money is being spent on. A closed-loop network with individual merchant contracts is required to ensure compliance with these regulations 

    • For a closed-loop network, you need contracts with both the merchants that accept your vouchers and the corporates that issue them to employees. It's very hard to get merchants to sign up without corporates and hard to get corporates without merchants

    • The result is oligopolistic markets with rational players. There have been some small periods of pricing competition but they don't last long. Experts have noted that the large players who dominate these markets are price rational and there is plenty of underlying growth to go after 

    • Edenred is the number one player in the majority of the geographies that it is present and they have 1.7x the relative global market share of the second largest Benefits and Engagement player, Pluxee  

  • Relatively sticky customer relationships and strong retention metrics  

    • Switching costs are not too high but there is low incentive to switch and high cost of failure  

      • A large company doing €500k in meal voucher volume per year is only paying Edenred €5k in commission. It's usually not worth the hassle to switch providers for a marginally cheaper alternative with relatively small absolute savings  

      • If you switch providers you have to give everyone new cards and if there are any issues with the vouchers employees get quite upset. You don't want upset employees in Europe because a lot of them are unionized 

    • Edenred has solid retention metrics with 95%+ gross business volume retention and ~104% net retention rate  

  • Edenred's customer is not the one paying the majority of the cost  

    • Edenred earns commissions on both sides of the transaction. Corporates typically pay ~1% commission while merchants pay ~4% on average. This is structurally attractive because the decision-maker (the corporate HR department choosing a benefits provider) bears only a fraction of the total cost 

• Edenred's benefits & engagement business has several tailwinds which help support a long runway of high single digit + EBITDA growth  

  • Growing face values driven by strong political support for tax-efficient benefit programs  

    • Tax-efficient benefits are popular with all stakeholders. For governments: popular amongst citizens / voters, spurs economic activity, improves VAT collection. For employers: cheap way to increase compensation for employees. In France, only ~50% of what the corporate pays actually goes onto the employee's pay stub after payroll and social security taxes. Benefits are considered standard at this point and employees expect them.  

    • The political dynamic is important. In our view, the vast majority of the time politicians care more about voters than the fiscal budget. It's rare for governments to reduce face value limits because it's an extremely unpopular thing to do 

    • Face value limits are growing in virtually every geography, and growing faster in fringe benefits than in core meal.  

      • In Romania, the country has increased the maximum face value of meal vouchers from €20 per day in '21 to €40 per day in '24  

      • In Italy, the fringe benefit tax exemption went from €258 per year per employee in 2019 to €1,000 per employee without kids and €2,000 with kids in 2024. There are 220 working days in a year so the €2,000 fringe benefit is comparable to ~€10/day, roughly equivalent to the meal voucher 

    • Legal face value increases also take time to grow into. If Romania increases the voucher face value cap, not every corporate steps into the top of that cap immediately. This creates a multi-year tailwind 

  • The SME segment remains underpenetrated and has attractive economics 

    • Historically it was uneconomical to sell into SMEs because paper vouchers had physical delivery and pickup costs that didn't justify the unit economics. Now that the business is almost entirely digital, it's much easier and cheaper to sell into the SME segment 

    • SMEs have corporate take-rates closer to 3%, roughly 3x higher than medium-to-large corporates, because they are smaller and have less bargaining power 

    • The SME segment remains significantly underpenetrated across most geographies 

      • In France and Italy, two of Europe's most developed meal voucher markets, SME is only penetrated 10% and 5%, respectively  

  • Cross-sell opportunity across 60mm+ users  

    • Edenred has over 60 million users they can sell additional products to, and we believe the relationships are somewhat sticky 

      • It doesn't make sense logistically or financially to have your meal voucher benefits be provided by one provider and your gift benefits to be provided by another one  

      • Employees don't want to carry two cards or have two different apps for their benefits 

    • Edenred's ARPU was €25 in 2016 and is €45 today, demonstrating ability to expand wallet share 

• Float duration stabilizing should support float income growth going forward  

  • Float duration declined from above 8 weeks in '18 to ~7 weeks today as the business transitioned from paper to digital 

    • It was even more elevated during COVID, average of 9.6 weeks between '20 to '22 

  • The transition is now essentially complete with 98% digital penetration and >80% of the float retention time now related to user retention, the time period during which the user keeps the funds before spending them  

  • With duration now stable, float value growth relative to business volume growth should accelerate as duration compression will be less of a headwind going forward  

• Regardless of how you treat float, we think Edenred is cheap on an absolute and historical basis  

  • The company is cash generative given negative networking capital dynamics and high EBITDA margins  

  • Edenred is currently trading at a low to mid-teens FCF yield (ex. float benefit) and ~10x '26 earnings which we think is too cheap for a business that can grow EBITDA HSD + going forward   

Risks:   

• Poor M&A track record  

  • Overpaid for Reward Gateway at £1.15bn in May 2023 at 12x revenue and ~25x adjusted EBITDA 

    • While the strategic logic of cross-selling engagement software into Edenred's 60mm+ user base makes sense, we think the ability to monetize this type of product in the geographies that Edenred operates is questionable  

  • Failed acquisition of CSI in 2019 

    • Edenred paid €521mm in January 2019 at 25x EBITDA for CSI  

    • CSI was a B2B accounts payable automation company focused on the US market  

    • Since completing the deal, CSI has performed poorly and doesn't make as much strategic sense as they initially thought  

  • However, the company has been more disciplined with capital returns more recently. Since the beginning of 2024, the company has returned ~€750mm to shareholders 

    • €417mm through share buybacks 

    • €320mm through dividends, the stock currently has a 7.3% dividend yield     

• Regulatory risk will always exist in the meal business  

  • The reason this business exists is because of government-created tax breaks. There will always be regulatory risk in the meal business as a result 

  • Some of the countries Edenred operates in are not the most politically stable or democratic (e.g., Mexico, Turkey) which adds an additional layer of unpredictability 

  • There is historical precedent for adverse regulation on non-meal benefits as well. The UK nationalized childcare vouchers in 2018 and Czech Republic reduced fringe benefit allowances to save government budget 

  • However,  

    • There is now much less geographic concentration than there was previously. No single country in meal represents more than 10% of consolidated EBITDA 

    • Face value reductions are rare and politically unpopular. We think politicians generally care more about voters than fiscal budgets 

  • Italy and Brazil were unique markets because corporate commissions were negative in those regions and this is not true for any other country in Edenred's portfolio  

• AI Risk of Lower White Collar Employment  

  • Edenred’s user base is predominately located in metropolitan areas, meaning less exposure to agriculture and industrial end markets and more exposure to white collar labor

  • There is risk that increased AI adoption could reduce white collar employment which would be negative for Edenred

  • We believe this is a long-term risk and one that is hedge-able. To the extent it does happen, we believe European companies would be some of the latest movers given employment law in the region