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We've discussed Western Union here quite a bit in the past mostly from the perspective of why Todd Combs hasn't purchased any shares for Berkshire even though Western Union was one of his larger positions at his hedge fund.

As I look through Western Union's latest 10-K and update my valuation, it occurred to me that perhaps Berkshire has an interest in the company but made a strategic choice to wait on acquiring a minority position in hopes of acquiring the entire company without paying a larger takeover premium. This is speculation on my part because in the past Berkshire has obviously been willing to take large positions in companies that it later acquired (BNSF is an obvious example). So there is probably nothing to this theory.

But as I look at WU's recent history, it does occur to me that even if the business is in slow decline, the cash flow generation is still very strong and the valuation could be attractive assuming that the business declines gradually rather than falling off a cliff. As a public company, however, Western Union would be unlikely to "gracefully decline" since the "institutional imperative" is to attempt to remain relevant.

Western Union has an enterprise value of around $10.6 billion and had EBIT of somewhat more than $1.3 billion in 2012. So far at least, there has not been any precipitous decline in net income, operating cash flow, or free cash flow despite the fact that margins have been under some pressure recently. Capital light business model with negative tangible book value and significant, although very manageable, debt levels.

It seems to me that if Western Union could decline "gracefully" over the next 10 years, an acquirer near the current valuation would do quite well and probably still end up with a viable residual business simply due to the brand value of the Western Union name. Free cash flow could be mostly harvested and sent up to Berkshire for reallocation removing the risk of desperate attempts by management to pour money into electronic payments either through lots of internal spending on new systems or (maybe worse) through expensive acquisitions funded by current cash flow.

(As an aside, I realize that WU is currently returning a majority of FCF to shareholders so the company isn't really being badly managed now. The concern is more related to what they may do with FCF if the business shows serious decline and management gets desperate).

I just find it interesting that Combs was such a bull on WU prior to joining Berkshire and has not purchased any shares. My working theory has been that Buffett is bearish on WU and maybe provided some insights to Combs that changed his mind as well. But another theory might be that Buffett is waiting patiently for bad headlines so he can step in and buy the entire company ... a cigar butt with some residual value.
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