Staring disaster in the face, US global money
transfer specialist MoneyGram International is grabbing at a
financial lifeline being thrown to it by a consortium led by
investment bank Goldman Sachs and private equity firm Thomas H Lee
Partners. The deal, constructed very much in the consortium’s
favour, would give it control of 63 percent of MoneyGram’s
equity.
Commenting on the consortium’s offer,
MoneyGram’s chairman, president and CEO, Philip W Milne, said: “The
board believes this transaction results in the best alternative
available to its shareholders and is critical to the long-term
health and vitality of MoneyGram.”
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The rescue plan calls for the consortium to
inject between $710 million and $775 million capital into
MoneyGram, a move required to repair devastation caused to its
balance sheet by crippling write-downs and losses in its investment
portfolio. The exact amount of the investment will depend on the
price at which MoneyGram is able to sell certain investment
portfolio assets as required under the terms of the agreement.
Indicative of the scale of the rescue package, MoneyGram’s
stockholder equity was $618.4 million as at 30 September 2007.
The initial investment will be made via common
stock representing about 19.9 percent of MoneyGram’s currently
outstanding common stock and non-voting preferred stock bearing an
initial interest rate of 20 percent which, said MoneyGram, “will
increase over time up to a maximum of 22 percent”.
At an unspecified future date, the common
stock and non-voting preferred stock will be converted into voting
preferred stock, giving the consortium voting control of MoneyGram.
The voting preferred stock will pay a cash dividend of 10 percent
or may accrue dividends at a rate of 12.5 percent in lieu of paying
in cash. MoneyGram expects dividends will be accrued for at least
four years.
After shareholder approval, the voting
preferred stock will eventually be converted into shares of common
stock at a price of $5 per share, about 15 percent of its share
price in February 2006. After conversion, the consortium will have
a 63 percent equity stake in MoneyGram, assuming a $710 million
investment.
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By GlobalDataIn addition to the permanent capital
injection, affiliates of Goldman Sachs will provide debt financing
of up to $500 million to MoneyGram in the form of 13.25 percent
senior second lien notes with a ten-year term. Another $200 million
of additional senior debt is expected to be raised at an interest
rate of no more than 625 basis points above the London Interbank
Offered Rate, currently about 3 percent. MoneyGram also expects to
have $350 million outstanding or available under an existing credit
agreement.
To comply with the terms of the consortium’s
offer, MoneyGram will have to ensure that total realised and
unrealised losses in its investment portfolio do not exceed $1.7
billion. Worth $5.3 billion on 30 September 2007, as reported by
MoneyGram, the portfolio was heavily laden with subprime
mortgage-backed debt investments and collateralised debt
obligations with an indirect subprime exposure. According to
MoneyGram, a total of $1.8 billion of investment portfolio
securities had been sold as at 11 February 2008, realising a $380
million loss, and assets worth another $1.9 billion remain to be
sold to comply with the consortium’s terms.
Alternative proposals
Though the offer may, as Milne argues, be MoneyGram’s best
alternative, some shareholders may feel short-changed given the
board’s shunning of a share-exchange offer valuing MoneyGram shares
at $20 each, made by global ATM operator and payment transaction
processor Euronet Worldwide in early December 2007.
However, MoneyGram has the right to solicit,
receive and evaluate alternative proposals from third parties
including Euronet until 7 March 2008. But given the scale of
MoneyGram’s refinancing, Euronet appears to be an unlikely white
knight; its stockholders equity of $691 million as at 30 September
2006 is dwarfed by the consortium’s refinancing of MoneyGram,
totalling $1.4 billion in permanent capital and debt.
