Why the Oxforex Group Ltd share price soared this week

Credit: 401(K) 2012

International money transfer business Ozforex Group Ltd (ASX: OFX) today announced it has agreed to grant exclusive due diligence to potential suitor The Western Union Company.

The bid comes amidst a wave of investment by US companies into Australia as the US dollar appreciated nearly 20% in value over the local dollar over the course of the past year.

Elsewhere US company Equifax has taken advantage of the generous exchange rate to go shopping for credit analytics provider Veda Group Ltd (ASX: VED).

Western Union is prepared to bid between $3.50 and $3.70 per OzForex share, which would value it around $815 million at the lower end of the offer price.

This is a big premium around 27% above OzForex’s already frothy pre-offer valuation and suggests Western Union’s interest has been perked by the beneficial exchange rate and its experience as a rival operator in the Australian market. Western Union is also keen on international expansion and tapping into new international markets that OzForex offers through current operations and its position in the Asia Pacific region.

Western Union’s money transfer business already has a lot of big-ticket clients in Australia in the higher education sector such as universities and some ASX-listed companies, although the other major appeal of the OzForex deal probably lies outside of its client book.

The deal would likely give Western Union even more technology to onboard clients faster, put smaller low revenue / high margin clients online, and focus on using people to win market share for the big ticket wholesale clients who transfer large sums each year and often remain customers of the banks. This is due to the more personalised level of service and better rates the banks are prepared to offer clients who offer sufficient volume and these clients will come further into focus as a target for Western Union.

Generally, Western Union will also have concluded that Australia is a market ripe for disruption with light regulation and little competition outside the big four banks that are disinclined to compete on margins except for the high-volume clients.

These factors have seen OzForex and other junior rivals grow rapidly with a decent outlook unless regulation over issues like the provision of general financial advice on FX were to tighten, or the banks decided to compete more widely on margins.

OzForex is being advised by old ally and former investor Macquarie Group Ltd (ASX: MQG) over the deal and I would be shocked if the deal were knocked back, especially given the generous valuation and opportunity it will give OzForex shareholders to cash out at a substantial premium.

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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