November 30, 2021

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Western Union Aims to Buy MoneyGram to Foil Peer Competition

Per Bloomberg, the world’s leading money remittance company Western Union Co. WU made a takeover offer to another money transfer entity, MoneyGram International Inc. MGI.

Shares of both companies were up following this news with Western Union gaining 3.5% and MoneyGram rising 6.15% in the day’s trading.

MoneyGram with a market capital of $154.7 million lags Western Union’s market capital of $8.23 billion. While Western Union has more than 550,000 agent locations across more than 200 countries, MoneyGram has a smaller reach, providing global money transfer services in above 380,000 agent locations.

The acquisition will bring together the first and the second-largest global send-and-receive networks, creating a powerful new player in international money transfer business that will add shareholder value to both companies.

This will be a win-win deal for both players if it comes through. MoneyGram has been losing its profitability and sustained successive losses in three quarters. Its total revenues have been declining since 2017 through the first quarter of 2020.  Revenues have been impacted by a deliberate strategy of higher compliance control and imposition of limits on certain transactions. Moreover, the U.S.-to-U.S. market continues to be challenging with an increasingly aggressive market pricing and a number of new competitors, such as PayPal Holdings PYPL and other money transfer options like Google Pay, Samsung Pay, Apple Pay among others.

Total revenues in the first quarter further fell due to the pandemic spread and government-issued shelter-in-place orders. This caused a slump in the company’s walk-in-business. Also high compliance and investment in business shot up costs over the years causing margin erosion.

MoneyGram, however, has been making concerted efforts to develop and build its digital money remittance platform like a fintech startup, which generates more profitability than its bricks-and-mortar business. However, its digital business now accounts for only 18% of its earnings and this will not be enough to cover up the earnings loss incurred from its  bricks-and-mortar money transfer business.

The company is suffering on both counts — revenues as well as costs — and has been trying to grow its business plus rein in costs to survive.
However, we believe, the path to profitability will be tough to achieve given the rough economic environment and an anticipated shrinkage of the global remittance market in 2020. The remittance industry this year is expected to shrink with the World Bank estimation of $572 billion in global remittance this year, down 20% year over year.

At the end of April, the World Bank issued a forecast projecting a 20% decline for global remittances in 2020. The current forecast for the ongoing year’s global remittances varies anywhere from a decline of 3.5% to 20%.
Therefore, to tide over the prevalent difficulty in operating environment, the partnership with a stable company will be best suited for MoneyGram.

MoneyGram, which has been facing financial crunch due to weak revenues following stiff competition posed by the entry of fintech players in the recent years, will find a stable partner in Western Union. Over the past five years, MoneyGram has lost 68% of its market value. In 2017, the Chinese company Ant Financial, an affiliate of Alibaba Group Holding Limited BABA, sought to acquire MoneyGram but the deal fell through due to international security threats.

Western Union is also enduring competition but has a better financial standing than MoneyGram, which will enable it to invest in growth projects.

Recently, the company announced that the lower rate of its transactions for its Consumer-to-Consumer business (accounting for nearly 83% of the company’s 2019 revenues) associated with the COVID-19 crisis improved to -21% for April from approximately -30% in late March. The April improvement was led by better trends in the retail business and 77% transaction growth in the digital money transfer business.

Western Union  saw a consistent rebound in transaction trends during May in the Consumer-to-Consumer business.

The stock has declined 22.7% year to date compared with the industry’s decrease of 0.13%.

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