Gustavo Ballvé on October 28th, 2009
Diversified financials, Industries, Investment Themes, Portfolio Management

World’s #1 and #2 remittance players. At first we imagined we could use Moneygram – which is smaller, under-covered and almost went bankrupt through the poor use of its float (CDOs and whatnots) – as a counterpoint to Western Union (4x larger and more focused on money transfers). But as one reads more about Moneygram, two points emerge: 1) although a “cigar butt”, it’s a whole different company (owners/managers/operations) and could become an investigation target; 2) its restructuring and recapitalization process (by Thomas H. Lee Partners and Goldman Sachs) is a “case study” in itself.

Now back to what got us interested in Western Union (“WU”):

Western Union, a spin off from FDC in Dec’ 06 at $20 (having reached $30 at the high and $10 at its lows), is trading at 18$, or 13x fwd earnings, has a relatively low tangible assets base (it doesn’t need to lease, own or operate offices/points of sale: they use OPA (other people’s assets) that are already ‘there’, like a post-office, a general retail or groceries store, a bank, a pharmacy – and its (WU’s) software solution seems to be easy to plug-in and get going), seems to enjoy capillarity + network effects (now with 400,000 agents connecting millions of people/businesses) and a very old, strong, familiar brand (trust is paramount).

The main point is to understand quickly the barriers to entry/ risk of substitutes in the core business, since in theory it would be “so simple” to banks, cards or processors to compete with them, and yet, at least in the core, they don’t. These potential competitors act as channels (Itaú, for instance, is a channel for Moneygram – deal signed recently).

The second point of attention would be ‘existence and use of float’ in the model. WU was making almost 50% ROIC before the spin-off. It is now using its excess cash to buy back shares and deleverage the company, as debt was inherited when it paid the traditional “special divididend” to the parent company at the IPO.

As usual, people are paying more attention to the Mexican-US corridor market ($26 billion), but emerging markets, like India ($55billion) and China ($40 billion) are already larger transfer pools. It should go without saying that cross-border “mobile-enabled” cash transfers (such as payments via cell phones or credit card money transfers) are a few years away due to regulation issues. Also, banks like Citibank, BofA, Wells Fargo and US Bancorp tried to go on their own and achieved negligible results (3% of the market altogether, and some like US Bancorp decided to act as distribution). Citibank tried something with Banamex more centely, and it should be interesting to see how it’s working. Wal-Mart has also started to play the game. In India, Internet remittances seem to have a relevant share (it’s totally different in Mexico) and might force some margin compression, and VISA is always trying something “new”. In 2006, WU’s internet transfer in the US was still pretty small, at $100MM, just 2% of its total revenues. Regulatory risk (especially in Europe) also demands a special check.

It all boils downs to the famous “why wouldn’t their hefty margins collapse?” question. That’s the case to kill.

Useful links:

Can the global flow of remittances survive the crisis? – Foreign Affairs, Oct. 16th 2009

Western Union empire moves migrant cash home – Old (Nov. 2007), big but very interesting NYTimes article on Western Union. Free registration required. Don’t miss the cool interactive chart! Also read a related article published 4 days before this one.

One of Western Union’s videos on Youtube. Yes, they have a channel… Check out the Global Migration Forum videos.

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