Western Union needs bulletproof plan to impress investors

Fri Feb 8, 2013 6:44am EST

Feb 8 (Reuters) - Western Union Co will need to come up with a convincing turnaround plan to quell investor unrest after the world's largest money transfer company said it would cut prices to regain ground lost to nimble competitors in emerging markets.

Expectations for fourth-quarter results, due on Feb. 12, are muted. Investors will be more interested in what the company has to say about its strategy in the wake of its warning in October that earnings would suffer in 2012 and 2013.

"They've reset expectations and they'll probably be able to meet their guidance," said Suntrust Robinson analyst Andrew Jeffrey. "The longer term question is whether their approach is sustainable," Jeffrey said, referring to the price cuts.

Analysts on average expect Western Union to earn about 35 cents per share in the quarter, according to Thomson Reuters I/B/E/S. That would be the lowest fourth-quarter profit since 2009. Revenue is expected to fall about 2 percent to $1.4 billion.

With a market capitalization 10 times that of closest rival MoneyGram International Inc, Western Union has long had the scale to brush off competition, and exclusive contracts with financial institutions have allowed it to charge premium prices.

But the $9 billion company has lost some of its exclusivity as fast-moving rivals offer cheaper rates in some key markets.

The company cut its earnings forecast in October and said it had lost market share in big markets including India, Russia and Mexico. Its shares fell to $11.92 after the announcement, their low for the 12-months to date.

The stock has regained some ground since, closing at $14.60 on Thursday, but it is still 24 percent below a 12-month peak of $19.13 in September.

Under-fire Chief Executive Hikmet Ersek has sought to shake up his company by having its global business leaders report directly to him. But some investors are yet to be reassured.

"Hikmet continues to think this is a growth company and investors simply do not," said Susquehanna Financial Group analyst James Friedman.

Suntrust Robinson's Jeffrey said he believed the chief executive had at least one year to prove his approach.

"If the questions persist and the company struggles, then late in 2013 there will be more restive shareholders," he said, adding that the challenges go beyond a few key markets.

"I think they have more of a structural issue in terms of global pricing."

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Western Union's near-20-year exclusive relationship with Mexican financial services group Grupo Elektra ended last February and the company's transactions in Mexico have since declined, while MoneyGram's grew by 24 percent in the fourth quarter.

Exclusive contracts are also under threat elsewhere. Western Union said a recent filing with the U.S. Securities and Exchange Commission that proposed laws in some countries in Africa, south Asia and eastern Europe would prevent exclusive deals with agents.

This could hit the company's business in India and Russia, where its premium prices can sometimes be 50 percent to 60 percent higher than those of its competitors.

"They have the brand, they have the leverage, they have the technology," said an investor who holds more than 2 million shares of Western Union but declined to be identified.

"But they can't see that (money transfer) is going digital and their price points are driving customers to other places."

Mobile payments and smaller digital players such as Boom Financial Inc and Sequoia Capital-backed Xoom Corp, which filed for an IPO earlier this month, are presenting a new challenge.

Ratings agency Moody's cited competition from online rivals as one of the reasons it downgraded Western Union's debt rating in November. Moody's maintains a negative outlook.

Moody's said Western Union's core business was "in a state of flux given competitive pricing pressures and emerging payment technologies" and that the company needed to invest.

The need to cut prices will mean sacrificing profits and margins. In 2013, Western Union expects operating income to decline by 10 percent to 15 percent from the previous year.

The company is currently trading at 10.1 times 2013 forward-year earnings. MoneyGram trades at 12.2 times.

With cash flow from operations exceeding net income in 14 of the last 20 quarters, according to Thomson Reuters StarMine, the company, with its strong brand name, has appeared on the radar of acquisitive private equity players.

The cost of a deal might be too high, however. Western Union's market capitalization of about $9 billion plus $4 billion in outstanding debt would imply an enterprise deal value north of $13 billion.

"There is value to the franchise," said Jeffrey. "It is possibly a takeover candidate, but the likelihood of an acquisition is relatively small."

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