Why MoneyGram is going private
File this under “highly misleading Bloomberg headlines”: “MoneyGram Seen Cashing In at Decade-High Price”.
The story is about a company which has put itself up for sale; today’s price is about $21.50 per share, which means the merger arbs don’t buy the Bloomberg tale that the final price could be as high as $27. But even if MoneyGram does end up selling for $27 per share, that would be a long, long way from constituting a “decade-high price”. MoneyGram’s IPO took place in 2004, at $16.93 per share; on a split-adjusted basis, that’s equivalent to $133 per share today. By the beginning of May 2006, MoneyGram was trading at more than $280 per share — more than ten times the best possible sale price in 2013. Here’s the stock chart, to put today’s share price in perspective:
So what is Bloomberg talking about? Here’s the way they justify their headline:
MoneyGram may be able to fetch as much as $27 a share, said Macquarie Group Ltd. and Compass Point Research & Trading LLC. At 37 percent more than the stock’s 20-day average, it would be the highest takeover premium in the commercial financial services industry since 2003, according to data compiled by Bloomberg.
This has nothing to do with stock price, or even corporate valuation. Rather, it’s just a measure of the takeover premium that MoneyGram might be able to fetch: the amount that the company is worth to a strategic buyer, or to some PE shop, compared to the amount that public shareholders have been willing to pay of late. Another way of looking at that number is that it’s the discount inflicted on the company for being public.
Why would being public mean that a company like MoneyGram trades at a discount? Simple: it’s one of those companies which is very profitable today, but whose long-term future is dim indeed. Money transfer is in the process of being disrupted: never mind bitcoin, all you really need is ubiquitous smartphones, and it’s not long before any number of companies have developed apps making money transfer incredibly cheap and easy. Money transfer used to have enormous barriers to entry; technology is eroding them, and the long-term future for MoneyGram and Western Union is cloudy at best.
That’s why MoneyGram is trading at a pretty depressed level for a cash cow which is going to have more than $100 million in earnings next year and whose income is hitting new highs. The current market capitalization is about $1.2 billion, for a forward p/e of 12. The forward earnings yield is a very healthy 8.3% — much higher than the cost of funds for just about any financial buyer.
MoneyGram, then, is up for sale for two different reasons. The first is simply that its current owners can sell it at a substantial profit to the bargain-basement price at which they recapitalized it at the height of the financial crisis. The second is that it’s a perfect PE play: it is a company throwing off large amounts of cash, and PE shops are great at maximizing the value of such companies, even if they ultimately go to zero.
Being publicly-listed is good for companies which are growing. It’s not good for companies which are shrinking. As a result, when a company is about to embark upon a long period of profitable decline, that’s normally the best time to take it private. The MoneyGram sale might come at a premium to the public share price. But that doesn’t mean MoneyGram itself has a rosy long-term future. Quite the opposite.