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There’s a lot riding on Ant Financial’s US$1.2b bid for MoneyGram

‘A rejection of the deal by regulators will pose onerous implications for future Chinese acquirers’

PUBLISHED : Thursday, 20 April, 2017, 9:55am
UPDATED : Thursday, 20 April, 2017, 10:38pm

When is an acquisition not an acquisition? When it is a Chinese deal. Overseas deals by Chinese companies have become so difficult and uncertain to close that they are affecting their legitimate expansion needs. The result could be substantially added costs for Chinese buyers.

Anbang Insurance’s serial failures in closing are the type that worry investment bankers. Its attempted US$14 billion takeover of Starwood Hotels & Resorts of the US, was eventually blocked by Chinese regulators, but it appeared as if the buyer didn’t have financing in place. Then, on Monday, US insurer Fidelity & Guaranty Life announced that it formally terminated a US$1.57 billion buyout with Anbang.

Bankers have said that sellers demand that Chinese buyers show proof of funding in the form of an account in the US or a letter of credit from a US bank. Yet all this still doesn’t mean a transaction free and clear of the authority of Beijing.

Anbang Insurance’s serial failures in closing are the type that worry investment bankers

That Wanda was willing to pay Eldridge Industries, owner of Dick Clark Productions, a US$50 million breakup fee after their deal fell apart showed mainland companies are willing to bear the big transaction costs that come with grandiose deals.

Ant Financial, the digital payments affiliate of China’s Alibaba, recently increased its bid for MoneyGram by 36 per cent to US$1.2 billion a month after Euronet Worldwide barged into its original US$880 million offer. Ant’s offer has been accepted by MoneyGram’s board, but is still pending US regulatory approval.

The pursuit for MoneyGram shows many of the obstacles facing Chinese companies pursuing deals in the US. Rival bidder Euronet and US politicians highlighted the political risks of selling to a Chinese organisation.

Payment processing and remittances are considered a core part of a financial system from a compliance viewpoint of know-your-client and anti-money laundering regulation. However, the kind of funds transfer and remittance being done by MoneyGram does not entail as much risk regarding personal financial data compared to a bank account or credit card. Nonetheless, in the current political environment, stirring fears of national security breaches could be an effective way to spoil a Chinese offer.

Ironically, regulatory rejection of Ant’s acquisition actually hurts financial service inclusion for average American workers. Money remittance of the type done by Moneygram serves a segment of workers and labourers, who according to the IMF, transfer about US$500 to US$600 a month to families in developing countries.

Global banks are withdrawing from processing such small amounts for customers without bank accounts because of the substantial compliance costs they must bear. They are denying loans and processing services for small money remittance firms because they fear billion dollar fines for compliance violations from money laundering risks. There is a real need for a low cost and efficient way to move these funds in the global economy.

But in its increasingly strident public relations campaign, Euronet stated that the Committee of Foreign Investment (CFIUS) would be reluctant to see a US company handling sensitive data of American citizens and military personnel fall into Chinese hands.

So far, there is little evidence that the acquisition would pose a national security risk. But that depends on how you define a national security risk in today’s capricious environment under President Trump.

Another regulatory wild card is that Trump has threatened to cut off US remittance payments to Mexico as part of an effort to restrict and deter illegal immigration. This sharp policy shift could affect part of MoneyGram’s business.

A rejection of the deal by regulators will pose onerous implications for future Chinese acquirers because it may also embolden competitors to seek CFIUS regulatory intervention any time a Chinese buyer threatens their industry position.

American companies are also complaining about their lack of fair trade access to China. According to a Bloomberg report, the American Chamber of Commerce in China says US companies in China face one of the most restrictive business environments in decades. Tech companies also complain about their lack of access to Chinese markets while their Chinese counterparts can freely buy American companies.

Ant’s financial advisors should have advised them to make a “highball” bid the first time around not only to preclude interference from a competing bid, but to avoid the adverse publicity battle. According to S&P Capital IQ data, Ant’s new bid represents a forward price/earnings of 27 times compared to an average P/E of about 24 for MoneyGram’s consumer finance peers including Western Union. So the current bid is not necessarily financially overpriced.

In terms of current deal economics, Chinese companies will face a more hostile landscape. They will likely be paying a premium for acquisitions not only in terms of price, but due diligence, consulting, legal and lobbying expenses.

Peter Guy is a financial writer and former international banker

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