MoneyGram International (MGI)
“Now Powered by Blockchain”
Table of Content
2.Stock Price Points for Buying and Selling
b.Earnings Per Share Estimates
3.Growth in Digital Presence
4.Partnership with Ripple Labs
5.The 2018 “Digital Transformation” Initiatives
6.High Compliance Cost
c.Equity (Stock) Ownership by Date
ii.Global Funds Transfer
h.Credit Facility Timeline
- MoneyGram is expected to see a decline in revenue but an increase in margins.
- The employment of blockchain technology may boost short-term stock prices, despite any lower future revenue and poor performance from the Company.
- In Q4 of 2019, the company will continue to leverage On-Demand Liquidity (ODL) and RippleNet, as a means of reducing operating costs and improving its operating margins.
MoneyGram International Inc. (MGI) is a blockchain-based money transfer company serving a segment of the estimated 1.7 billion unbanked individuals. In 2018, the Company generated 88% of its total revenue from money transfer services and competes with companies such as Western Union (WU) and PayPal (PYPL) for shares in the unbanked money transfer market.
The Company struggled financially in FY 2018 due to the implementation of its “Digital Transformation” restructuring program, increased competition, and high compliance costs in the money transfer industry.
The 2018 “Digital Transformation” program modernized its business by introducing mobile apps and reduced headcount. Operating costs include direct costs, operational support, salary and compensation, and other costs, which account for 99% of revenue, leaving only a 1% operating margin.
In Q4 of 2019, the company will continue to leverage On-Demand Liquidity (ODL) and RippleNet, as a means of reducing operating costs and improving its operating income margins. The Company’s investment in blockchain technology and a stronger digital presence should help it gain new market shares.
The restructuring program launched in 2018 will improve operating margins in the 2019 financial statement. However, the weak demand for money transfer services due to competition is a concern for the Company. Additional cost due to regulations and a weakening economy will limit its expected 2019 and 2020 revenue. MoneyGram is expected to see a decline in revenue but an increase in net income margin.
The long-term financial performance of MGI is difficult to estimate. However, the Q3 and Q4 2019 earnings are estimated to be stronger quarters because of stronger demand during the holiday season, and the elimination of any residual restructuring costs from the “Digital Transformation” initiative implemented back in 2018. The employment of blockchain technology may boost short-term stock prices, despite any lower future revenue and poor performance from the Company.
Reasons for Stronger Q3 and Q4 Quarterly Financials
- Increase in revenue due to a historically greater money transfer demand during the holiday season
- Decrease in compensation cost due to the completion of its restructuring program at the end of Q2 2019
- Decrease in salary cost due to the termination and/or transfer of 400 global employees
- Decrease in transaction cost due to the implementation of RippleNet (ODL) in Mexico, the Philippines, and more
- Decrease in operational support cost due to the omission of any major lawsuit payouts until 2020
- Increase in money transfer revenue due to a stronger digital presence.
Reasons for Weaker Q3 and Q4 Quarterly Financials
- Decrease in revenue due to competition from PayPal, Western Union, and possibly Facebook
- Decrease in revenue due to restrictions placed on immigrants coming to the U.S and the United Kingdom
- Decrease in revenue due to possible weakened conditions in the U.S construction, energy, manufacturing, and retail industries
- Increase in operational support cost due to possible lawsuits and violations of anti-fraud and anti-money laundering laws from the implementation of ODL
- Decrease in total revenue due to lower revenue from bill payment, money order, and official checks services
2. Stock Price Points for Buying and Selling
- The 52 Week High is $6.70 per share (September 2019)
- Ripple Labs purchased (10%) of MGI at $4.1 per share (June 2019)
- Entry into a Second Loan Agreement at $2.41 per share (June 2019)
- Discounted Cashflow Model estimated a stock price of $5.44 (December 2018)
- Thomas H. Lee Partners purchased (38%) of MGI at $2.5 per share (March 2008)
2.a. Sales Estimates (Millions of $)
2.b. Earnings Per Share Estimates
3. Growth in Digital Presence
In 2018, the Company launched its new mobile app for digital transactions and redesigned its website (available now in 24 countries). Within the money transfer industry, MGI separates itself from competitors such as Western Union and PayPal by offering a mixture of digital and physical locations for its customers through a network of agents and sub-agents.
4. Partnership with Ripple Labs
The Company utilizes Blockchain technology, ODL, and XRP, in Q3 of 2019. The deal decreases costs in the Global Revenue Transfer segment, which is the Company’s primary revenue driver. The stock price currently does not completely factor in the use of Blockchain technology into its stock price. The price-to-earnings ratio (13.58x) at a stock price of $4.1, currently reflects the stock price of a money transfer company and not the price-to-earnings ratio of a more sophisticated technology company (28.41x).
5. The 2018 “Digital Transformation” Initiatives
In 2018, under the “Digital Transformation” initiative, the Company restructured its organization. 400 of its 999 global employees are expected to be replaced by outsourcing, independent contractors, and consultants. MGI invested in reward programs and spent $57.8 million on modernizing infrastructure, deploying new computer programming techniques. The cost of its 2018 restructures increased the cost by $24.5 million by the end of the Q2 2019 quarterly financials. The Q3 and Q4 reports will be free of any cost associated with the “Digital Transformation” initiatives.
6. High Compliance Cost
In 2018, the Company paid $70 million to the U.S government for an amended Deferred Prosecution Agreement (“DPA”) settlement, regarding poorly implemented anti-fraud programs from 2003 to early 2009. As part of the agreement and other new anti-fraud regulations, the Company will continue to incur an estimated $40 million each year to comply with the U.S and international money transfer standards. The Company will not expect to pay another settlement payment related to the amended DPA until FY 2020.
MGI has a net debt to equity ratio of 124.7% compared to the industry standard of 2%. Revenue must increase in the future for MGI to cover operating expenses of about $1.4 billion annually, and the long-term debt of $842 million due in 2023 ($650 million) and 2024 ($245 million). The money transfer segment depends on the global economy. A weakened global economy will put pressure on revenue, raising concerns about possible defaults. As of June 2019, the Company holds onto $4.6 billion in total liabilities. The most total liability ever held by MGI was $8.5 billion on March 31, 2015.
MoneyGram International, Inc. is a global money transfer company that provides services around the world. The Company operates through its wholly-owned subsidiary, MoneyGram Payment Systems, Inc. (“MSPI”), and generates revenue from money transfer, bill payment, money orders, and official checks. Mediums used to facilitate these core services include mobile applications, www.moneygram.com, mobile wallets, kiosks, and agent locations. MoneyGram markets itself as an alternative to banks for unbanked individuals or people who are not served by banks and financial institutions. The Company identifies unbanked individuals as its main customers. Per the World Bank:
“They [The World Bank] estimates that 1.7 billion adults are unbanked […] 2019 global remittances will approximate $715 billion, based on 2018 global data.”
The Company’s competitors consist of companies in the money remittance and payment industries, along with companies that can effectively capture their competitive landscape. The peer group includes Euronet Worldwide Inc., PayPal Holdings, Inc., Fiserv, Inc., Global Payment Inc., Total Systems, Inc., The Western Union Company, and Facebook if regulatory approval is obtained.
8.a Revenue Driver
The Global Funds Transfer segment is the primary revenue driver, providing money transfer services and bill payment services. The Company generates 88% of its revenue from money transfer. The money transfer service generates revenue from consumer transaction fees and the management of currency exchange spread between “send” and “receive” currency.
The Company recognizes and records money transfer revenue when transferred funds are available for pickup by the recipient. Each money transfer is considered an independent agreement between the Company and the customer.
The company relies on migration patterns, in which individuals move from their native countries to countries with more economic opportunities. A large portion of money transfer services is utilized by immigrants and refugees sending money back to their native countries.
Revenue is significantly impacted by weakened economic conditions in the U.S construction, energy, manufacturing, and retail industries. The primary currency that is exchanged with the U.S dollar includes the European euro, Mexican peso, British pound, and Indian rupees. A large share of annual money transfer revenue occurs in the third and fourth quarters as a result of holiday transactions.
Bill payment services generate 5% of the total revenue. The bill payment service generates revenue from fees charged on each completed transaction. Bill payment transactions include urgent bill payments, routine bill payments, and the load and reload of prepaid debit cards.
The financial paper products segment accounts for 7% of total revenue, providing money order products and official checks. Money order revenue is generated by charging per item and other fees as well as the investment of funds underlying outstanding money orders, which remain outstanding for approximately six days. Official check revenue is generated from outsourcing check services to U.S banks and credit unions. The Company charges per item and other fees, as well as from the investment of funds, which remain outstanding for four days. The Financial Paper Products segment is expected to be negatively impacted by the migration of customers to other payment methods. As of December 2018, the segment currently accounts for 7% of total revenue.
Thomas H. Lee Partners, L.P (“THL”) operates as a private equity firm based in Boston, Massachusetts. The firm specializes in leveraged buyouts, growth capital, industry consolidations, and recapitalization. Founded in 1974, the firm ranks 22nd out of the top 300 private equity firms based on funds raised. On March 25, 2018, THL purchased $760 million of Series B and Series B01 Preferred Stocks, convertible into 79% of the common equity of the Company at $2.5 per share.
The largest shareholder, THL has the right to designate two to four directors, who each have equal votes and who together have a total number of votes equal to the number of directors as is proportionate to the common stock ownership (38% as of June 2019). THL currently appoints two of the nine members of the Board of Directors, each THL member has multiple votes and hold a majority of votes on the board of directors. The interests of THL may not coincide with the interest of other investors.
Ripple Labs operates as a technology company, developing the Ripple payment protocol and its exchange network. The Company simplifies money transfer under the RippleNet (ODL), a global payment system utilizing blockchain technology. Ripple (XRP) facilitates the exchange between “send” and “received” currency instantaneously. Under the RippleNet, money transfer becomes faster, more secure, and less costly. SBI Holdings, under the symbol SBHGF, currently own 10.5% of Ripple Labs. SBI is a financial service company group based in Tokyo, Japan. MoneyGram International, Inc. owns 100% of MoneyGram Payment Systems, Inc (“MPSI”), which conducts money transfers, bill payment, official checks, and money order services.
8.c. Equity (Stock) Ownership by Date
As of December 31, 2018, Thomas H. Lee Partners, L.P (“THL”) and Goldman Sachs & Co. have a combined 50.6% ownership of all convertible common shares. THL has the right to designate two to four directors, each THL representatives currently has multiple votes, and the THL representatives together hold a majority of votes on the Board of Directors. As of FY 2018, THL investors hold 64.5 million common shares (if the outstanding D stock were converted into common shares) and Goldman Sachs hold approximately 71,282 shares of D Stocks, which are convertible into approximately 8.9 million shares of common stock. THL holds 42.7% of outstanding common shares and 36.8% of outstanding shares on a fully converted basis.
As of March 17, 2019, THL collectively holds 23,737,858 shares, which constitutes 42.15% of Outstanding Shares and 36.39% of outstanding shares on a fully converted basis.
As of June 17, 2019, Ripples Lab entered into a securities purchase agreement (the “SPA”) with MoneyGram International Inc. and agreed to purchase 5,610,923 shares of Common Stock at a purchase price of $4.10, which represents 9.95% of common stock outstanding. Under the SPA, Ripple Labs received a ten-year warrant to purchase 1,706,151 additional shares of common stock at $4.10. The SPA provides that Ripple will not for a period beginning on the date of the SPA and ending in June 2020, sell any common stocks or enter into any swaps or derivative transactions. The SPA agreement mandates the use of Ripple’s xRapid platform (ODL) by MoneyGram and an agreement between Ripple Labs and MoneyGram International Inc. to reasonably deploy the platform for cross-border payment.
As of June 28, 2019, THL, holds 23,737,858 shares, which constitutes 38.29% of the Common Stock outstanding. Collectively, Ripple Labs and THL own 29,968,753 shares of common stock, representing 47.86% of Common Stock outstanding.
8.d. Risk Factors
The following graph compares the stock price from December 31, 2013, to October 26, 2019, for MGI’s main competitors which consist of Western Union and PayPal. The graph assumes the closing price for each company at the end of the month.
8.d.i. Legal Proceedings
In November 2012, the Company announced that a settlement was reached with the United States District Court for the Middle District of Pennsylvania (“MDPA”) and the U.S Department of Justice (“DOJ”) for an internal investigation under a Deferred Prosecution Agreement (“DPA”) regarding poorly implemented anti-fraud programs from 2003 to early 2009. In November 2018, the Company entered into the amended DPA. Under the agreement, the Company will pay an aggregate amount of $125 million to the Government, of which $70 million was paid in November 2018 and the remaining $55 million must be paid by May 8, 2020.
On August 23, 2017, the internal Revenue Service (the “IRS”) filed a motion regarding possible deficiencies in 2005-2007 and 2009 corporate tax returns. Pending the outcome of the appeal, the Company may be required to file amended tax returns and make additional cash payments of up to $19.5 million.
8.d.ii. Global Funds Transfer
In 2018, the Global Funds Transfer segment had an operating loss of $5.9 million, compared to an operating income of $4.9 million during 2017. The operating loss is attributed to a decrease in the volume of money transferred and the average face value per transaction and pricing. This segment represents the main revenue driver, accounting for 88% of yearly revenue in 2018.
In 2018, the Company entered into new partnerships with OXXO and Visa Direct. OXXO is Mexico’s largest convenience store retailer. Visa Direct is a real-time push payment platform that will give customers the choice to receive funds either directly into their bank account or to a Visa prepaid card. Walmart, the largest agent, accounting for 10% of total revenue in 2018 for MGI, launched Walmart2world products, a new white label money transfer service that allows customers to send money from Walmart to any MoneyGram locations. The rebranded product is expected to reduce top-line growth during the first half of 2019.
In 2018, the Company continued to launch new compliance measures to meet the requirements regarding anti-fraud and anti-money laundering programs. Due to the implementation of new compliance measures and fraud prevention measures, the Company has seen a negative impact on its top-line growth in 2018, which is still persistent in the first half of 2019. The Company will continue to incur an estimated $40 million each year to comply with the U.S and international money transfer standards.
8.e. Cost Breakdown
In the first half of 2018, the Company initiated the “Digital Transformation Program” to modernize the business, reduce operating expenses, and focus on improving profitability. The Company began offering money transfer through www.moneygram.com and applications on mobile devices and desktops. Money transfer through the Company website and application grew 13% during 2018. MoneyGram believes that combining their physical presence with their newly incorporated digital presence will differentiate itself from other competitors.
The “Digital Transformation” program modernizes MGI by reducing cost and improving margins. The Company estimates that 400 employees will be terminated or transferred. The program is substantially completed in Q2 of 2019 at a total of $24.5 million. The majority of the cost is severance fees ($19 million).
The restructuring program implemented mentioned above will impact operating costs, which represents 99% of top-line revenue. The company will mainly focus on the reduction of total commission and direct transaction, compensation benefits, and transaction and operational support, accounting for 51%, 18%, and 21% of operating expenses.
Total commission and direct cost include fixed-rate commission or variable-rate commission based on a percentage of fees charged to the customer. Both the “receiving” and “sending” agent earns commission in most situations. Direct cost includes customer verification and funding costs.
Compensation benefits include salary, employee benefits, management incentives. In 2018, the Company paid $260 million in compensation and benefits.
Operational support costs are related to marketing, advertising, and legal expenses. Marketing costs have remained between $50 million to $65 million for the last three years.
As part of the “Digital Transformation Program”, the Company plans to decrease cost and headcount. The Company will close 61,000 unproductive locations and/ or high-risk locations. In 2019, 400 of its 999 global employees are expected to be replaced by outsourcing, independent contractors, and consultants. Compensation benefits include salaries and benefits, management incentives, and payroll and other employee costs will be directly reduced. In 2018, transactions and operational costs included the $70 million DPA legal payment to the U.S government. The Company will not have any substantial legal fees until 2020, which is always included in legal transactions and operational support cost.
During 2018, cash from operating activities decreased by $30 million paid from DPA payments in November 2018. As of June 2019, the Company netted $38.1 million from its operating activities, which is $10 million less than the cash flow from operating activities as of June 2018.
The Company spent $57.8 million on modernizing infrastructure, deploying computer programming techniques. The effect reduces costs and the capital expenditure associated with IT processes, its agents, apps, and websites. As of June 2019, the Company spent $29.2 million on equipment and property, similar to the $28.5 million spent as of June 2018.
In 2018, the Company spent $9.8 million on principal debt payments for stock-based compensation and payments to the IRS. As of June 2019, the Company spent $28.9 million on debt repayment, an increase from $4.9 million as of June 2018. Net proceeds from issuing stocks ($30 million) netted to $7 million after accounting for transaction costs and amendments to debt ($21 million).
The Company primarily generates liquidity from cash flows created by the sale of cash, cash equivalents, investments, and proceeds from investments. As of December 2018, the Company holds $3.4 Billion in liquefiable assets to cover additional operating expenses and any other unforeseeable events. Should the Company require additional liquid assets, it can finance through external sources and amounts available in their credit facility (up to $45 million). The Company is regulated in the U.S by various state agencies and must maintain a pool of liquid assets equal to the regulatory payment service obligations. The Company has $842 million in total long-term debt obligation due, with $0 million due less than 1 year, $0 million due between 1-3 years, $842 million due in 3-5 years.
8.h Credit facility Timeline
On March 28, 2013, the Company entered into an Amended and Restated Credit Agreement (“the 2013 Credit Agreement”) with Bank of America, N.A.(“BOA”). The 2013 credit agreement provides for up to $125 million from a senior secured five-year Revolving Credit Facility and up to $850 million from a senior secured seven-year term loan facility (“Term Facility”).
On April 2, 2014, the Company entered into Amendment No.1 (“the Incremental Agreement”) with BOA which provides for a $130 million tranche under the Term Facility and an increase of $25 million in the aggregate revolving loan commitments for a total of $150 million.
On December 12, 2016, the Company entered into Amendment No.2 with BOA which decreased the aggregate revolving loan commitments from $150 million back to $125 million. The amendment extends the maturity date of the revolving credit commitments from March 28, 2018, to September 28, 2019.
On December 31, 2018, the Company has $904.4 million on its senior secured borrowings and has no outstanding letters of credit under the Revolving Credit Facility.
On January 31, 2019, the Company entered into Amendment No. 4 with BOA which decreased the aggregate revolving credit commitments from $85.8 million to $45 million.
On June 26, 2019, the Company entered into a Second Amended and Restated Credit Agreement with Bank of America. The company entered into this agreement using the credit from the 2013 credit agreement and cash on hand. The initial Amended and Restated Credit Agreement entered in 2013 is replaced by the new credit agreement signed on June 26, 2019.