Alibaba Affiliate Ant Financial Raises Bid To Acquire MoneyGram

Alibaba Group’s (NYSE:BABA) affiliate Ant Financial raised its bid to acquire money-transfer company MoneyGram to $1.2 billion. ^[1] The new bid is worth $18 per share, up from $13.25 offered in January. ^[2] MoneyGram’s shares soared 25% to around $16 following the news back in January, and has traded at that level since then. Subsequently, Euronet Worldwide offered to acquire Dallas-based MoneyGram for around $15.20 per share in March. ^[3]

E-commerce giant Alibaba has witnessed strong growth in its core retail and wholesale operations over the years. While the online retail and wholesale business continue to grow and generate profits for Alibaba, the company has constantly looked to diversify and invest in long-term growth domains. As a result, the company has invested significantly in non-commerce businesses such as cloud computing, internet infrastructure, digital media and entertainment. Moreover, Ant Financial (formerly Alipay) has invested in Indian payment gateway and e-wallet PayTM to improve its presence in the online payments space (read more: Alibaba To Draw Long-Term Gains From PayTM Investment).

According to our estimates, the non-commerce businesses make up over 8% of our $99 price estimate for Alibaba’s stock. Our price estimate is slightly lower than the current market price.

See our complete analysis for Alibaba

MoneyGram International

MoneyGram (NASDAQ:MGI) is the world’s second largest money transfer company in the world after Western Union (NYSE:WU). Money transfer companies operate in the global remittance market, where individuals working outside their country of birth send a part of their income back home, primarily in developing countries. MoneyGram has around 350,000 outlets in retail shops, post offices and banks across 200 countries, giving it a strong presence in the global remittance market. These companies make money from commissions on transfers (or transfer fees) as well as exchange rate margins.

The global remittance market is estimated to be a $600 billion market with the biggest remittance route (sending cash from US to Mexico) making up $24 billion of that market. MoneyGram has a roughly 5% share in the global remittance market. ^[4] The traditionally remittance industry has largely been dominated by cash transactions, wherein users walk into physical locations to deposit and collect money. However, the proportion of electronic transfers has increased over the years, paving way for fintech startups to gain from existing market leaders such as MoneyGram, Western Union and Ria (owned by Euronet). New players such as WorldRemit, Xoom (owned by PayPal) and TransferWise offer electronic payment options at significantly lower transfer fees and have smaller margins on currency exchanges.  ((These are the five best remittance companies in the world, Business Insider, July 2016)) Given that only around 6% of the global remittance market is digital at the moment, there is a huge market opportunity for fintech companies to grow in this market space. 

Key Challenge Faced By Ant Financial

Ant Financial Services Group (formerly Alipay) is a major Alibaba affiliate, with roughly 33% investment from Alibaba and significant investment from Alibaba management and partners. ^[5] Ant Financial is a leading global fintech company with over 450 million annual active users for payments, as compared to 180 million active users for Paypal. The daily average number of transactions on Alipay are over 150 million as compared to 180 million for MasterCard and 260 million for Visa.

Similarly, Ant Financial has over 150 million annual active users on its wealth management platform, 380 million cumulative users of its insurance services and 130 million users of its credit reference services making it a market leader in China. The sheer size of its user base is significantly higher than its American and global counterparts. In a recent round of funding, Ant Financial was valued at around $60 billion, ^[6] Ant Financial has the potential to be worth over $100 billion over the next couple of years. ^[7]

Despite a strong bid, deep pockets and a clear strategy to expand beyond China, Ant Financial could face difficulty in acquiring MoneyGram. Ant Financial’s bid is likely to face scrutiny from the Committee on Foreign Investment in the United States (CFIUS), an American agency panel that reviews foreign acquisitions of domestic assets for national security concerns. ^[3] This approval would not be required for the competing bid from Euronet Worldwide. Moreover, it could be a favorable option for U.S. policymakers given the tough stance of the current government on the U.S.-China trade and foreign policy agreements.  

Losses Likely To Continue In The Near Term

According to Alibaba’s most recent filings, the company’s non-commerce segments combined reported an operating loss while the online retail and wholesale businesses reported profits. ^[8] Alibaba is investing heavily in digital media, cloud computing, online video streaming and other new ventures, banking on long-term growth. If Ant Financial successfully acquires MoneyGram, it could be yet another key strategic investment for the parent company in a quickly transitioning market.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Ant Financial Raises MoneyGram Bid 36% to Fend Off Euronet, Bloomberg, April 2017 [↩]
2. China’s Ant Financial buys US payments firm MoneyGram, CGTN, January 2017 [↩]
3. Euronet Worldwide trumps Ant Financial’s offer to buy MoneyGram, Reuters, March 2017 [↩] [↩]
4. MoneyGram predicts remittance mergers, Financial Times, December 2015 [↩]
5. Ant Financial Breakdown, Alibaba Press Release, June 2016 [↩]
6. Alibaba’s future relationship with financial arm Ant Financial a mystery for shareholders, Global Times China, April 2016 [↩]
7. Jack Ma’s Finance Business May Be Worth More Than Goldman Sachs, Bloomberg, September 2016 [↩]
8. Alibaba’s 6-K For Q3’17, SEC, March 2017 [↩]