MoneyGram International Inc. (MGI) reported first quarter loss per share of 26 cents, substantially lower than the Zacks Consensus Estimate of earnings of 2 cents, but in line with the year-ago quarter.
Results included stock-based compensation costs of $4.6 million, $2.9 million of restructuring and reorganization costs and $1.5 million in costs associated with the recapitalization. Reported net loss was $21.7 million as compared with net loss of $21.4 million in the year-ago quarter. However, net income before preferred dividends and accretion recognized on preferred stock came in at $14 million, modestly up from $10.8 million.
Total operating expenses climbed 4.3% year over year to $262.3 million. Lower investment income, higher operating expenses and lower revenue per transaction that continues to be within the $50 price band in the U.S., were partially offset by higher money transfer transaction volumes and lower tax rate.
MoneyGram’s total revenue for the quarter was $294.0 million, up 2.6% from the year-ago period, but a tad lower than the Zacks Consensus Estimate of $295 million. While fee and other revenue climbed 3.2% year over year to $290.0 million, investment revenue decreased 28.6% year over year to $4.0 million.
Segment Results
In the Global Funds Transfer segment, MoneyGram’s revenue rose by 5% year over year to $269.8 million. Money transfer transaction volume increased 14%, while money transfer fee and other revenue grew 8% to $239.6 million from the prior-year period.
On a constant currency basis, money transfer fee and other revenue increased 9% on a year-over-year basis. However, bill payment transaction volume dropped 8% year over year, whereas, fee and other revenue declined 11% to $30.1 million from the prior-year quarter. Operating margin plummeted to 9.8% from 10.8% in the year-ago quarter. Global agent locations reached 233,000, an increase of 18% over the prior-year quarter.
Total money transfer transactions originating outside the U.S. escalated 17% from the prior year. Transaction volume to Mexico increased 10% year over year, significantly improving from a negative 11% growth in the prior-year quarter. Besides, excluding transactions sent to Mexico, MoneyGram’s transactions originating in the U.S. increased 9% year over year. Intra-U.S. transaction growth increased 17% over the prior-year period.
In the Financial Paper Products segment, MoneyGram’s total revenue declined 15.8% year over year to $23.9 million. However, operating margin modestly rose to 35.1% from 31.3% in the year-ago quarter, reflecting reduced commission expenses.
Liquidity
As of March 31, 2011, MoneyGram had cash and cash equivalents of $3.73 billion, net receivables of $411.3 million and available-for-sale investments of $145.2 million. MoneyGram ended the quarter with $640.1 million of outstanding debt and assets in excess of payment service obligations of $244.2 million.
Recapitalization Update
On March 7, 2011, MoneyGram entered into a recapitalization program with its investors including private equity firm Thomas H. Lee Partners (THL) and investment bank Goldman Sachs Group Inc. (GS”>GS) to improve its vulnerable capital position.
Accordingly, the recapitalization program will enable the conversion of the previously held preferred shares into common shares of MoneyGram. As a result, THL will now own 55.1% in MoneyGram while Goldman will enjoy a stake of about 30.3% in the company.
The recapitalization program further offers about 28.2 million shares and $140.8 million in cash to THL, while Goldman will receive about 0.016 million shares along with a cash payment of $77.5 million as consideration from MoneyGram. Previously, an investment conglomerate led by THL and Goldman bought a 63% equity stake in MoneyGram for $710 million, in order to bail out the latter at the peak of the financial crisis in March 2008. This stake was held in the form of preferred share interest.
Moreover, a healthy capital constitution also paves the way for acquiring a new senior credit facility, which is projected to be utilized for refinancing the existing debt as well as for funding the recapitalization program. Accordingly in early April 2011, MoneyGram announced that a syndication process had been completed for a new $540 million senior secured credit facility consisting of a $390 million 6.5-year term loan B and a $150 million five-year revolver.
Furthermore, the proceeds will refinance the issuer’s existing A and B term loans and fund the cash portion of the conversion premium on the issuer’s preferred stock. However, the pricing has not been disclosed. Besides, closure of the new credit facility is subject to terms and conditions and is also dependent on the successful closure of the recapitalization exercise.
Our Take
MoneyGram’s core business is expanding with a vast global network, increasing money transfer transaction volumes and disciplined expense management. While the company’s business continues to grow in new emerging verticals, these verticals generate lower revenue per transaction compared with the traditional consumer credit verticals, which continue to experience secular and economic declines.
However, though the restructuring program taken up in 2010 will take longer to reap strong results, refinancing debts and recapitalization reflect a sturdy capital position in future. We believe that the company has the potential to overcome the impact of the volatile U.S. dollar against other currencies and additional losses in its investment portfolio, once the global economy rebounds to its historical highs.
On April 26, MoneyGram’s peer Western Union Co. (WU) reported fourth quarter earnings of 35 cents per share, a penny higher than the Zacks Consensus Estimate, benefiting from a modest margin improvement led by its Consumer-to-Consumer segment, partially offset by $24 million of pre-tax restructuring charges.
MoneyGram carries a Zacks #3 Rank, which translates into a ‘Hold’ recommendation over the short term. Additionally, over the medium-to-long term, we suggest the investors stay ‘Neutral’.
GOLDMAN SACHS (GS): Free Stock Analysis Report
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WESTERN UNION (WU): Free Stock Analysis Report
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