Xoom or MoneyGram, Western Union Can Choose or Lose

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Western Union Co. should be thinking about a deal.

The $9.8 billion leader in the fragmented payments industry is facing intensifying competition amid already disappointing shareholder returns. Now, it has an opening to make a counteroffer for Xoom Corp., a company that’s tapped into the fast-growing market for digital money transfers between migrant workers in the U.S. and their families in countries such as India, the Philippines and Mexico.

Xoom has agreed to sell itself to PayPal -- the payments unit being spun off from EBay Inc. -- for $25 a share, or about $890 million. Its stock is trading above that level because some investors think the price is too low and expect competing bids. A smart move for Western Union may be to grab hold of Xoom before PayPal does. Western Union still gets the bulk of its revenue from agent-based cash transfers. A deal would help shore up its digital business and better position itself as deep-pocketed giants such as Facebook Inc. enter the market.

Another option for Western Union is to buy MoneyGram International Inc., its smaller rival valued at $473 million. The two were in early-stage merger talks, people familiar with the matter said in May, but both companies denied this. MoneyGram would provide Western Union with more cash-transfer customers and cost-cutting opportunities. Such a deal probably wouldn’t help on the digital side, unless Western Union could eventually shift those cash customers to its own online and mobile products.

“For Western Union to redeploy capital to either outbid for Xoom or bid for MoneyGram, it would likely be favorably viewed by the market,” Joseph Stauff, an analyst on the event-driven/special situations team at Susquehanna Financial Group LLP, said in a phone interview.

Xoom ‘Edge’

Xoom is the better of the two targets, Stauff said.

“If you look at Xoom’s product, they have an edge. And now there’s a fear that a viable competitor, PayPal, gets a hold of this strategically important asset,” he said. “The case for buying MoneyGram is that it provides near-term synergies, additional market share and therefore increased volume for the foreseeable future.”

Dan Diaz, a spokesman for Englewood, Colorado-based Western Union, declined to comment on whether it’s considering deals with Xoom or MoneyGram.

“Our transformational strategy and plans for innovation, put in place a few years ago, are working,” Diaz said. “Western Union continues to build upon its strengths –- connecting the digital and physical worlds,” he said, also citing the company’s brand strength and compliance, anti-money laundering and settlement capabilities.

Lagging Shares

In the nine years since Western Union went public, the company’s volatile shares have returned just 3.6 percent, compared with a 59 percent gain in the Standard & Poor’s 500 Index. On Thursday, Western Union gained 1.2 percent to $19.19 at 10:10 a.m. in New York.

The stock’s underperformance spurred talk of potential shareholder activism in the past year. In May, all of its directors were facing re-election, providing an opportunity for activist investors to overhaul the board. But none showed up. That same month, after it was said to be in talks to buy MoneyGram, Western Union shares surged. Since PayPal announced it was buying Xoom in July, Western Union has lost 7 percent.

The company is battling increased competition from cheaper digital alternatives such as Xoom, said David Ritter, an analyst for Bloomberg Intelligence.

“Western Union was caught a little flat-footed by not having better tools online to send money from bank accounts, mobile phones and computers,” Ritter said in a phone interview. “The risk now is if Xoom becomes owned by PayPal, a far larger company, are they going to set off a round of price cuts in order to take market share?’

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