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MoneyGram survives a scare and is looking to grab more of the money-transfer business

Money-transfer company MoneyGram International Inc. had a near-death experience as one of the more unlikely victims of the mortgage meltdown.

Pummeled by losses starting 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, based in Dallas, 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, although far from ho-hum: Grab more of the expanding global money-transfer business.

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“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 & Co., an investment banking firm in Memphis, Tenn. “Now it’s about delivering on performance, growth and profitability.”

Leading the effort is Pam 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.

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 Wal-Mart stores.

The company makes money primarily from commissions and from exchange rate spreads, said Brett Horn, a financial analyst at Morningstar Inc., a Chicago 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% 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.

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Revenue was essentially flat last year at nearly $1.17 billion, after falling in 2008 and 2009. Revenue rose nearly 3% 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.

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.

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She recently 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.

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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% of the company. At some point, analysts say, the two big companies are apt to start selling their shares.

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

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“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.”

Case writes for the Dallas Morning News/McClatchy.


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