On Monday, Western Union (NYSE:WU) announced a $975 million deal to acquire the cross-border business payments division of Travelex Holdings. The company already had a foothold in the market from another acquisition in 2009.
But with the Travelex deal, Western Union will get a nice boost. It will increase its presence in 16 countries and bring on some important bank partners. However, Western Union is expected to see its full-year earnings take a hit of 2 cents a share because of large integration costs.
On news of the transaction, Wall Street showed some skepticism as the stock price fell by 3.2% to $19.34.
But does the selloff bring this an opportunity to buy shares? Let’s take a look at the pros and cons:
Global payments business. Across the world, Western Union has a highly recognized brand. It helps that it has a network of over 445,000 agent locations in more than 200 countries. About 85% of these are outside the U.S.
A large amount of Western Union’s revenue comes from fees to send money or make payments.
New markets. Western Union’s consumer business has much room for growth. Perhaps the biggest opportunity is in Asia, where the company still has a small market position. In fact, with its large cash flows, Western Union is in a good position to expand its operations and buy rivals.
The Travelex deal. This looks like a smart move. According to research from McKinsey, the market size is about $24 billion, but it’s also highly fragmented. Thus, Western Union has an opportunity to use its scale to benefit from the growth.
What’s more, Travelex has high pretax margins of roughly 30%.
Economy. At the core of Western Union’s business is migration, which is dependent on growing economies.
Unfortunately, there are some headwinds in developed as well as emerging-market countries. Interestingly enough, it is usually cyclical industries – such as construction, hospitality and manufacturing – that have a big impact on Western Union.
Disruptive technologies. Smartphones are growing at a rapid rate, and they’re increasingly being used for payments. This is definitely a big threat for Western Union. Might companies like Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL) take away market share?
Regulations. No doubt, this is a big risk factor for Western Union. In light of the volatility in the financial sector, there has been more and more pressure for regulations, such as for consumer protection, privacy and security. In fact, this is a worldwide phenomenon.
When it comes to the global payments business, scale is critical, and Western Union is the leader.
At the same time, the company still has long-term growth opportunities, whether in the consumer or business markets. The good news is that Western Union has huge cash flows to bolster its competitive advantages, as seen with the Travelex deal.
Western Union shares also are selling at an attractive valuation of 13 times earnings. The pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.