World’s leading money transfer company, Western Union Co. (WU - Analyst Report) has renewed its agreement for international money transfer with Elektra, S.A.B. de C.V, a leading financial services company and specialty retailer in Latin America. With more than 1,800 points of sale in Mexico, Grupo Elektra offers a solid franchise for the Western Union Money transfer business.
Western Union had first entered into an agreement with Grupo Elektra in 1993 to offer international payments transfer services in Mexico. The pact was renewed once again in 2006 when other Western Union branded payments such as Vigo and Orlandi Valuta were launched in Mexico.
Mexico accounts for around 6% of Western Union’s revenue. The company has been operating in the Mexico corridor for more than a century and it accounts for a significant amount of the company’s annual remittance volumes.
However, the past couple of years saw the Mexico corridor posting a lackluster performance. Revenues in 2010 were flat against a transaction growth of 2%. Recessionary conditions in 2009 resulted in a 12% transaction decline and a consequent 15% decline in revenues. Nevertheless, with a gradual improvement in the economy, the region showed a 2% revenue increase in 2011, with transaction volumes remaining unchanged relative to 2010.
Western Union’s Mexico business continues to be affected by ongoing compliance procedures related to its southwest border agreement.
In 2012, Western Union will be evolving its business model and practices related to Mexico. The company is in the process of renewing agent agreements and changing the way it operates in Mexico, including compliance-related changes. As a result of these factors, management expects its Mexico business to decline in 2012, as it modifies the business.
Barring the above factors, we note that Mexico qualifies as one of the top four inbound remittance countries in the world and it is anticipated that the remittance market will continue to recover as the global economy improves.
Mexico’s vast remittance market has also dragged Western Union’s close peer Moneygram International, Inc. (MGI - Analyst Report). The company offers its services in the Mexican market in partnership with Visa, which allows consumers to visit any of the 35,000 MoneyGram locations in the U.S. to send funds to eligible Visa accounts in Mexico.
Western Union currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. We are also maintaining a long-term Neutral recommendation on its shares.