Feb 8 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
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
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
END OF EXCLUSIVITY
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
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
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."