EditorSpeak: Consolidation – A Major Industry Trend

Amongst the trends that stand out in the international remittance area, one of the most talked about is consolidation. However, if you look closely, there appear to be two, almost opposing trends in the market simultaneously – one is increasing competition with a larger number of businesses entering the money services arena and the other is consolidation. While these seem to be opposite movements, in reality, the increase in the number of players is counteracted by the consolidation taking place in the industry and the overall number of players remains relatively stable. A report that analysed the effect of greater competition on pricing in this business suggests that increasing competition results in pricing declines which further encourages consolidation, to leverage the benefits of economies of scale. The report goes on to show a decline in pricing points in Latin American and Caribbean corridors over the past five years and successfully relates it to increased competition, consolidation, aggregate volume of remittances, amount sent, and exchange rates.

Another factor that is contributing to the trend is the number of banks and large financial players set to enter the lucrative remittance market. These players often find the easiest way to establish a presence is to buy a strong local brand. According to a report by TIGRA 'Money Down the Wire', Western Union is expected to initiate further acquisitions in emerging markets such as China and India and eliminate competition. Central America is divided between two global banking heavyweights, HSBC, which purchased number one Banistmo of Panama for $1.8 billion and Citigroup, which bought number two Cuscatlán for $1.5 billion and number one credit card issuer Grupo Uno for an undisclosed amount last year. According to Nick Ford of CapGemini, their newest World Payments Report suggests that the ongoing consolidation in the banking sector may spread to the remittance area. We could see large banks involved in deals with some of the larger money remitters in an effort to strengthen their network and presence in the money transfers sector.

Regulatory issues are a large driver of costs in the industry – according to a report by Manuel Orozco 'International Flows of Remittances', some money transfer operators (MTOs) claim that 65% of their time and personnel often need to be devoted towards compliance concerns. These costs, in addition to pricing pressures from rising competition, mean that many banks and MTOs need to either scale up, exit the business or merge in order to achieve economies of scale. In addition to compliance requirements, the US Treasury Department has looked at MTOs as high-risk activities and encourages banks to close MTO bank accounts. At the beginning of 2006, Bank of America cancelled all accounts with MTOs, including Western Union and MoneyGram. According to a report presented at the Inter-American Development Bank meeting in 2006, some MTOs have been forced to sell their operations, or have considered doing so, because they are left with virtually no available accounts.

Alongside the large deals in the remittance market, we may soon see another transaction with the potential acquisition of MoneyGram, the global number two in money transfers. Euronet's hostile bid at $1.65 billion and counting anticipates synergies amounting to $36m in cost savings and a total of $85m annually by 2010. While Euronet has achieved robust growth over the last five years and has made no secret of its interest in MoneyGram, the latter continues to resist Euronet's offer. The question is: can it do better? While MoneyGram has been hit by the subprime crisis in its Payment Systems arm, it has a strong balance sheet with $9bn in assets and an EBITDA of $250m. Typical bids for the money transfers industry are 10xEBITDA and Euronet paid about 14xEBITDA for Ria Envia. On the other hand, S&P and Fitch downgraded the company to 'BB' from 'BBB' after it announced a planned recapitalisation: equity of $750-$850m through investment firm, Thomas H Lee and debt of $550-$750m from third parties. Concerns about the company's strategy postrecapitalisation, dependence on the sale of its remaining portfolio of assetimpaired loans and large additions to its unrealised losses have caused share price to plummet. There remains much scope for consolidation considering the fragmented nature of the industry and the MoneyGram deal still has several turns left.