Moneygram Merger With Alibaba Affiliate Weighs On Western Union

Shares of Moneygram International (MGI) are on the rise after the company agreed to merge with Alibaba’s (BABA) affiliate Ant Financial Services Group. In a note to investors this morning, SunTrust analyst Andrew Jeffrey said he believes the deal may shake up global remittance, expecting shares of Moneygram’s competitors Western Union (WU) and Euronet (EEFT) to remain under pressure on the news. Meanwhile, his peer at Stifel argued that the deal is at-the-margin negative for Western Union.

MERGER: MoneyGram and Alibaba’s affiliate Ant Financial Services announced that they have entered into a definitive agreement under which the former will merge with the latter, with stockholders of MoneyGram being offered $13.25 per share in cash. The transaction is valued at approximately $880M for all of MoneyGram’s common and preferred shares on a fully diluted basis and Ant Financial will assume or refinance MoneyGram’s outstanding debt.

INCREASED COMPETITION: Following news reports on a possible deal, which has subsequently been confirmed, SunTrust’s Jeffrey told investors that he expects Western Union and Euronet’s shares to continue to be under pressure. While his first reaction is that the global remittance industry could become more competitive, the analyst noted that it is unclear how Alibaba would position Moneygram and on which corridors it would focus. Regardless, Jeffrey said he believes more competitive pricing poses a greater relative risk to Western Union than to Euronet, considering the former’s larger global footprint and duopoly status with Moneygram in many global corridors. In many ways, the Alibaba/Moneygram deal would validate Euronet’s emerging global remittance share growth strategy, he contented. The analyst reiterated a Hold rating on Western Union’s shares.

MODEST NEGATIVE FOR WESTERN UNION: Also commenting on the deal announcement, Stifel analyst John Davis told investors in a research note of his own that Moneygram’s takeout is a modest negative for Western Union as the former could become a stronger competitor given Alibaba’s significant resources that could be used to invest in the business. While noting that the purchase price is cheap, the analyst pointed out that a potential acquisition of Moneygram by Western Union has been viewed as a possible catalyst for the latter, but he sees little probability of a competing bid. Given the conservative approach to M&A of Western Union’s management, a takeover offer for Moneygram is now off the table, he contended. Nonetheless, Davis said he is more concerned with the recent Federal Trade Commission and Department of Justice consumer fraud fine and continued focus on regulatory and compliance risk embedded in the business model. He reiterated a Hold rating on Western Union’s stock, but lowered his price target on the shares to $20 from $21.