Euronet Bids for MoneyGram, And Girds for a Fight If Necessary

Euronet Worldwide Inc., which on Thursday made public a stock offer valued at $1.65 billion for rival money-transfer company MoneyGram International Inc., has rejected an offer from MoneyGram to discuss the possible combination of the two companies because of a condition MoneyGram wanted to impose that would have stopped Euronet’s efforts to acquire its larger competitor.

In a statement released Thursday afternoon, Minneapolis-based MoneyGram said it was willing to discuss Euronet’s offer provided the Leawood, Kan.-based company agreed to a standstill agreement. MoneyGram said Euronet rejected that condition. In a conference call Euronet held Thursday morning to discuss the offer with analysts, company founder and chief executive Michael Brown confirmed his company has no interest in holding talks on those terms. “There’s no way I’m going to promise, just to talk to them, not to go after them,” he said.

Brown, who charged MoneyGram shareholders have been victimized by mismanagement of the company, called for quick action by MoneyGram’s board of directors on Euronet’s offer. He does not rule out a proxy fight to gain control of MoneyGram. “Should MoneyGram refuse our offer, they would be forcing our hand and we would have to consider other options,” he said.

Citing market opportunities that would result from a merger, Euronet on Dec. 4 submitted an offer that included a premium of 43% to MoneyGram’s share price, based on an exchange of 0.6179 shares of Euronet stock for each share in MoneyGram, whose shareholders would end up owning 46% of the combined company. By late on Thursday, with Euronet’s stock taking a beating and MoneyGram’s rallying on news of the merger proposal, that premium had shrunk to about 3%. Still, at around $17 a share, MoneyGram is trading at little more than half its 52-week high, reached in January.

MoneyGram, which refuses to comment on Euronet’s proposal beyond its statement, has become an improbable casualty of the worldwide implosion in subprime credit. Its Payments Systems division, which processes money orders and so-called official checks, invested in mortgaged-back bonds on which the company had to take a $230 million writedown in the third quarter. At the same time, it hired JP Morgan to review options for the division, which accounts for one-quarter of its revenues and has shown virtually no growth.

Though Brown called MoneyGram’s core assets “poorly managed,” he said Euronet’s proposal is based on more than taking advantage of his competitor’s investment woes. “This is not an opportunistic ‘we’re going to buy MoneyGram because their stock is low,'” he said in the conference call. Instead, he said, the two companies combined would present formidable competition for The Western Union Co., the No. 1 player in money transfer with a market share approaching 14%, according to Boston-based researcher Aite Group LLC. MoneyGram is No. 2, with 3.2%, and Euronet is fourth, with 1.3%. Indeed, the business worldwide is so fragmented that Brown argues the combined company could grow quickly without having to take any share from Western Union. With current trends in immigration, he said in the call, “there’s a tremendous untapped market in money transfer.”

Some experts agree. “If the two companies were to come together it would be a very good fit,” says Gwenn Bezard, research director at Aite Group and author of a recent study of money transmitters. He points out that a merger would combine MoneyGram’s strength in money transfer with Euronet’s in electronic funds transfer and prepaid wireless top-up. Euronet, which started in 1994 with an ATM network in Hungary, maintains a network of 370,000 point-of-sale terminals for prepaid top-up, along with 10,000 ATMs and 67,000 agent locations in more than 100 countries. MoneyGram has 138,000 agents in more than 170 countries.

By acquiring MoneyGram, Bezard says, Euronet would accelerate its growth in ways it could not otherwise do. “It would take years for Euronet to become a significant player in money transfer—organic growth will not be enough,” he says.

In another sign of potential fit between the companies, while 25% of Euronet’s revenue comes from the U.S., that ratio is exactly reversed for MoneyGram, which derives 25% of its sales from overseas.