Bouncing back from crisis, MoneyGram looks to prosper

DALLAS – Money transfer company MoneyGram International Inc. had a near-death experience not long ago as one of the unlikelier victims of the mortgage meltdown.

Pummeled by losses beginning in 2007 on mortgage-related investments, it stayed afloat when private equity fund Thomas H. Lee Partners and Wall Street titan Goldman Sachs Group Inc. swooped in, provided an infusion of cash and took control in 2008.

Shareholders in MoneyGram, which moved its headquarters to Dallas from Minnesota late last year, recently approved a deal that analysts say is a step toward the eventual exit of Lee Partners and Goldman.

Now the challenge for MoneyGram is more straightforward, though far from ho-hum: Grab more of the expanding global money transfer business.

“It’s no longer about trying to fix the capital structure or tiptoe along a tightrope,” said Robert Dodd, a financial analyst at Morgan Keegan, an investment banking firm in Memphis, Tenn. “Now it’s about delivering on performance, growth and profitability.”

Leading the effort is Pamela Patsley, 54, a veteran of payment processors Paymentech Inc. and First Data Corp. She became MoneyGram’s executive chairman in early 2009 and took the chief executive job later that year.

Among the company’s selling points for her: It’s in a growing industry, fueled in part by global migration patterns. And in a business dominated by a small number of large companies and a large number of small outfits, MoneyGram is the No. 2 player behind industry leader Western Union Co.

“I felt we could make this where the wind was in our sails,” Patsley said.

Patsley describes her business background as “growthy” and says one of her goals is to broaden MoneyGram’s reach.

In recent months, executives from partner companies in the Philippines, Russia and Colombia have visited the Dallas headquarters.

MoneyGram added a net of about 37,000 agent locations last year, ending the year with 227,000 in about 190 countries and territories. Now the total is 233,000. Most are independent agents; the largest network of locations is at Walmart stores.

Scale is critical.

The company makes money primarily from commissions and from exchange rate spreads, said Brett Horn, a financial analyst at Morningstar, a Chicago-based investment research provider. Once the payment processing system is in place, the cost of adding transactions is small and the potential profit rises.

“It’s really a business where bigger is better,” Horn said. “We like Western Union a lot more than MoneyGram because it’s No. 1 by a wide margin. But being No. 2 in a scalable industry is not necessarily a bad place to be, either.”

MoneyGram brought in nearly 80 percent of last year’s revenue from its money transfer business, which includes transactions within the United States as well as those involving other countries. Other revenue came from bill payment services, money orders and an official check business.

Revenue was essentially flat last year at nearly $1.17 billion after falling in 2008 and 2009. Revenue rose nearly 3 percent in the first three months of 2011.

Globally, the flow of remittances – the money sent home by people working abroad – bounced back last year to 2008 levels after a dip in 2009 amid economic woes, according to a World Bank report last month.

Officially recorded worldwide remittances amounted to an estimated $440 billion in 2010, including $325 billion to developing countries, according to the report.

For now, the company is “moving down the road at a pretty good pace,” Patsley said.

“Long term, it’s back to making sure we never get too comfortable,” she said. “Just making sure you stay on your toes and not on your heels.”

More growth is expected in coming years, fueled by people such as Francisca Hernandez, 37, a housecleaner from Mexico who has been in Dallas 14 years.

Earlier this week, she used MoneyGram to send $200 to her father in Mexico from a branch of Cliff’s Check Cashing in Dallas.

“The money gets there fast, and it’s easy for my relatives to pick it up,” she said.

In some ways, MoneyGram is still clawing its way back from its mortgage disaster.

The company stuffed its investment portfolio with mortgage-related assets, including some tied to subprime mortgages.

Analysts say it was trying to boost yields. But when the mortgage market collapsed, so did MoneyGram. Its stock went from nearly $30 a share in mid-2007 to less than $2 a share at the end of March 2008.

In exchange for preferred shares, Lee Partners and Goldman stepped in with $760 million in equity investment, severely diluting existing shareholders. Goldman also provided $500 million in debt financing, and the company obtained additional debt financing of $250 million.

Shareholders in March approved a deal in which the preferred shares held by Lee Partners and Goldman were converted to common shares or common equivalents worth about 85 percent of the company. At some point, analysts say, the two big companies are apt to start selling their shares.

MoneyGram may be back on its feet, but it still faces risks.

In March, the company revealed fraud-related inquiries by a federal grand jury in Pennsylvania and FinCEN, a financial crimes enforcement unit of the U.S. Treasury.

One focus appears to be the company’s consumer anti-fraud program from 2004 to 2009.

MoneyGram also said it had received civil investigative demands from a working group of nine state attorneys general who are looking into whether the company has taken adequate steps to prevent consumer fraud.

In 2009, the Federal Trade Commission announced that the company would pay $18 million to settle allegations that it allowed its money transfer system to be used for fraud. At issue were transactions within the United States and between the United States and Canada involving, for example, phone scams.

Patsley said the company has boosted its anti-fraud measures and is cooperating with law enforcement against suspected fraudsters.

“Let’s help build the case to get them arrested, get them in jail,” she said.

MoneyGram also faces shareholder lawsuits alleging that the recent deal with Lee Partners and Goldman is unfair.

Another risk is economic. High unemployment means that there’s less money in the hands of current or potential customers. Another downturn could make matters worse.

For now, the company is “moving down the road at a pretty good pace,” Patsley said.

“Long term, it’s back to making sure we never get too comfortable,” she said. “Just making sure you stay on your toes and not on your heels.”