BofA: Western Union, Moneygram Will Underperform Market With Xoom Under Paypal

In a report published Monday, BofA Merrill Lynch analyst Sara Gubins maintained Underperform ratings on The Western Union Company (NYSE: WU) and Moneygram International Inc (NASDAQ: MGI), citing "structural concerns."

Paypal, Inc. (NASDAQ: PYPL) has announced the acquisition of Xoom Corp (NASDAQ: XOOM) for $25 per share, or an enterprise value of $890mn, in cash. The deal is expected to close in 4Q15. "In our view, Xoom under PayPal poses a greater risk to Western Union and MoneyGram in the digital remittance market, given increased resources and significantly better global brand recognition," analyst Sara Gubins wrote.

While the digital category is a small part of both Western Union and MoneyGram, it is the fastest growing segment.

In the report BofA Merrill Lynch noted, "In 2014, Western Union grew its digital transactions 39% YoY vs 5% growth on a consolidated basis. MoneyGram grew digital 34% YoY vs 2% growth on a consolidated basis. MGI's overall growth was negatively impacted by Walmart's new private label service in US-US."

Gubins commented further that there were structural concerns, including stiffening competition, rising compliance costs, continued pricing pressure and high commission expense.

The price objectives for Western Union and MoneyGram were estimated at $17 and $8, respectively.