Lou Dobbs, the CNN pundit, has worries. America is doomed by a combination of exporting jobs to India and importing illegal immigrants from Mexico. First Data (NYSE: FDC ) seems to watch his show. During its second-quarter results call, the immigration debate was given as the cause of a slowing in its U.S.-to-Mexico remittance business, part of Western Union.
Raising the immigration debate is surprising. First, in this Fool's opinion, it's implausible. Do you really think the average migrant rushes home from work to catch the Lou Dobbs show and then decides how much money to send home? If you left your country to support your family, you're probably going to send back as much as you can afford -- whatever those in Congress and CNN say. Second, transaction and processing revenue from Mexico -- though the largest source of single-country revenue -- still only makes up 10% of Western Union's total revenue.
Western Union is an excellent business. It makes a lot of money providing money transfer services to mainly migrant workers sending funds to family and friends in other locations. In 2005, operating profits were $1.4 billion on revenues of $4.2 billion. Driven by emigration from China, India, Mexico, and the Philippines, the world population of emigrants is expected to grow from 185 million today to 283 million in 2050. Western Union, with a 15% market share, will benefit greatly from this trend.
First Data has a strong, profitable business in Western Union. So is it going to sit back and enjoy?
No. First Data announced in January that it will spin off Western Union in a tax-free transaction later this year. Western Union, acquired in 1995, does look different from First Data's other businesses in credit and debit card processing. It focuses directly on consumers, volumes are driven by money transfers rather then merchant transactions, and business is captured via 270,000 agents in 200 countries. It operates a franchise-type model. Western Union provides agents with a money transfer processing system to originate and pay money transfers. The agents provide the physical infrastructure and staff to complete the transfers and are paid a percentage of revenue.
In contrast, the transaction processing businesses in the "New First Data" make money by processing huge volumes of transactions in back office factories. Western Union and First Data are different but related businesses, built around the principle of providing payment and processing infrastructures.
Investors have to weigh the benefits of being able to own Western Union directly versus the costs. Current segment reporting for Western Union is good, so it's straightforward to see what's going on with the business. Yet the annual increase in costs for Western Union as a public company are expected to be $65 million to $75 million, and at least this much to create the spin out.
Lou, is it worth it?
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