You could try the Mesh Warp effect, which relies on your skill moving handles. You're not just scaling the vertical dimension but also warping the center of the image more than the edges.
I'm assuming you are trying to animate this transition? You're going about it wrong whatever.
Do it backwards. Start with the un-stretched image and use the mesh warp effect to squash it. Then reverse the key frames.
If you're not trying to animate and are just trying to straighten it then stop. Just recreate the image.
It's a beveled oval, no big deal. You create one, duplicate it 31 times. Use the align tools to spread the
layers into a grid then put a solid behind it. You gotta learn to pick your battles.