Western Union Banks On The `Unbanked'

It brought households across America news of births and deaths, triumphs and tragedies. Now, Western Union is at the center of its own drama. With its once great telegram business decimated by new technology and a balance sheet groaning with debt, Western Union is headed for bankruptcy court. But the 142-year-old company is a long way from the corporate garbage dump. At a court hearing scheduled for Apr. 2, Western Union, renamed New Valley Corp. in 1991, hopes to gain approval for a "prepackaged" bankruptcy plan that should get the company back on its feet. Its executives have already been aggressively reshaping its chief subsidiary--Western Union Financial Services Inc. (FSI)--to become a financial-services provider to middle- and low-income consumers. Their goal, says James F. Calvano, the company's president and chief operating officer: to make the company "a bank for the unbanked."

That market is huge: an estimated 15 million households without traditional banking relationships, chiefly the poor, immigrants, and others who, for such reasons as income and culture, have shunned, or been shunned by, banks. The Upper Saddle River (N.J.) company already serves these people with money transfers. Now, it hopes to offer them a wide array of other services.

Two years ago, anticipating either filing for or being forced into bankruptcy, executives of then-Western Union Corp. restructured the company so that its operating division would be protected from a bankruptcy filing. They created a new legal parent, New Valley, to hold the debt, now at least $800 million in outstanding claims. It will also be the entity that will be taken into bankruptcy, lessening the taint on the Western Union name. "We changed the name to protect the franchise," says Robert J. Amman, New Valley's chief executive officer. While Amman, a longtime technology expert, focuses on the restructuring, Calvano, whose background is in consumer finance, handles operations.

INTRICATE WEB. The effect of these moves lets the new FSI be nearly debt-free. In 1991, say analysts, FSI had a cash flow of $34 million, after special charges and $9 million in dividends upstreamed to New Valley, on revenues of $374 million.

Much of New Valley's debt is the legacy of a 1987 restructuring by turnaround investor Bennett S. LeBow, financed with the help of Drexel Burnham Lambert Inc.'s sale of $500 million in junk bonds. LeBow still controls about 42% of New Valley.

At the Apr. 2 hearing, New Valley will propose a bankruptcy plan that will give creditors $495 million in a mix of secured, unsecured, and subordinated payment-in-kind debentures. Amman says the company has "oral agreements in principle" on major issues with three major creditors and noteholders: Pension Benefit Guaranty Corp., Carl C. Icahn, and former Drexel mergers-and-acquisitions chief Leon D. Black.

A key element of the plan involves salvaging $1 billion in net-operating-loss carryforwards, which can be deducted from future profits. To accomplish this, the plan allows New Valley shareholders to retain an 80% stake in FSI through a four-tiered holding company structure. Major secured creditors will also likely get a small equity stake in the newly reorganized company. Predictably, junior and senior unsecured creditors, who would take a big hit, are complaining about the plan. That could derail the deal.

Once they get the prepack behind them, New Valley executives hope to be able to devote their full energies to leveraging more products and services off one of the best-known brand names in America. Western Union money transfers have been handled for 122 years through a distribution network that now numbers 18,000 agents in the U.S. and 3,000 overseas--most of them sole proprietorships. The company is beginning to use this network to market such additional products as money orders, electronic bill-paying, secured credit cards, check cashing, and a money-transfer service geared to debt-collectors.

Some of these services can be highly profitable. Take secured credit cards, typically used by individuals who have tarnished or inadequate credit histories. To get a card, they leave a deposit equal to or slightly larger than their credit line with the issuer. While most of the credit-card industry is being forced to lower rates, secured card issuers are still able to charge hefty annual fees and 20% interest rates.

FSI won't have these markets to itself, however. Services such as secured credit cards and check-cashing are becoming very competitive. Even the money-transfer business has attracted growing numbers of players. Integrated Payment Systems, a subsidiary of New York-based First Data Corp., has started an electronic bill-paying service and is aggressively pursuing the money-transfer business with American Express MoneyGrams. And while Western Union hopes to be the first nationwide check-cashing operation, Southland Corp. is testing out a "service center" concept that includes check-cashing in a number of its 7-Eleven stores.

GLOBAL REACH. FSI still has about 90% of domestic money-transfer market, but that business is growing at only around 5%, so the company is looking overseas for faster growth. FSI has gone from 6 markets in mid-1991 to 55 countries today, with plans to find new sales agents in 210 countries. Money transfers to Mexico and overseas sent 1992 revenues from money transfers up 14%.

The company's expansion plans are being constrained by its financial woes. "There have to be significant markets where we can leverage our name and infrastructure, and it can't require much capital," says Calvano. For example, in its new joint venture with an Argentine company called ITRON, FSI will help set up a utility-bill-paying service that will allow customers to pay bills through a Western Union agent instead of sending in a check. If the service is successful, FSI will become a partner and receive royalties. FSI also has joint ventures involving its check-cashing and secured-card businesses. FSI provides marketing muscle, a customer list of 15 million names, and in some cases, financing--in return for a piece of the action and its partner's expertise.

Reviving the 142-year-old company won't be easy. But if Amman and Calvano can capitalize and build on the formidable Western Union brand name, New Valley may just be able to climb over its mountain of debt.


1984 Banks cut off lines of credit. Company stops paying dividends on its stock

1987 Leveraged buyout investor Bennett S. LeBow undertakes a "rescue" restructuring using massive amounts of junk bonds

1990 Struggling with debt, company tries to recapitalize and fails. Sells telex and electronic mail systems for about $175 million and uses proceeds to buy back expensive debt

1991 Western Union Corp. is renamed New Valley Corp.; Western Union Financial Services Inc. becomes a subsidiary. New Valley stops making debt payments in April. Creditors file involuntary bankruptcy petition

1992 Company files a prepackaged bankruptcy plan

1993 Hearing takes place on involuntary bankruptcy petition. Company is granted 30 days to formalize an agreement with creditors before bankruptcy hearing on Apr. 2