Visa Inc.; Market Cap: $190.62bn (as of 06/11/2015)
Visa Europe Ltd.; Market Cap: N/A (as of 06/11/2015)
Introduction
On November 2nd, Visa Inc. (NYSE: V), the payment processing giant which holds an approximate 39% market share of the credit card marketplace, announced the acquisition of Visa Europe Ltd., its former subsidiary and European sister firm. The $23.4bn deal aims at creating one single global company that would boost the acquirer’s earnings in Europe, which are currently trifling compared to its rival’s, MasterCard (NYSE: MA).
About Visa Inc.
Visa Inc., based in Foster City, California, is an American multinational financial services corporation that assists electronic funds transfers in 200 countries through a network of 2.3 billion credit and debit cards. Launched in 1958 under the name BankAmericard, Visa processed over 65 billion transactions with a total volume of $7.3 trillion in 2014, generated $12.7bn Revenue and a $5.4bn Net Income.
About Visa Europe Ltd.
Visa Europe Ltd. is a London-based cooperative of over 3,700 banks and various payment service providers operating Visa-branded products and services across the Old Continent. The cooperative offers debit, credit, prepaid and virtual cards, provides consulting services for merchant agents, and substantially contributes in improving payment security in European businesses and governments. It used to operate under the same umbrella network as Visa Inc. until 2008, when the latter announced it would go public. Under the IPO restructuring, Visa U.S.A. Inc., Visa Canada Association, and Visa International Service Association merged into one single company, while Visa Europe Ltd. became a separate membership association, owned by its member banks.
Industry
In the payment processing ecosystem, five sets of players interact to process transactions: acquirers/processors, issuers, card networks, gateway providers, and independent sales organizations (ISOs). Visa operates as a card network and shares the industry with five big actors. In fact, MasterCard, American Express, Discover Network, Union Pay, JCB, and Visa occupy over 97% of the global payment networks market share. Whereas the previous moguls differ greatly in terms of their geographical prominence and payment methods focus, Visa remains the global leader in check transactions, credit transfers, credit cards, direct debit, and debit cards.
The Deal
Under the terms of the transaction, Visa Inc. will acquire Visa Europe for upfront cash consideration of $12.4bn and preferred stock convertible into Visa class-A common stock valued at $5.4bn.
Therefore, Visa is paying at least $17.8bn (and up to $22.7bn) in exchange for $1.4bn in 2014 net revenue and $368m in pre-tax profits and plans on $600m – $650m in closing and integration costs over time, offset by $200m of potential annual cost savings.
Moreover, Visa Europe members could potentially receive an earn-out cash payment, since the deal includes as much as $5.05bn in payments, payable following the fourth anniversary of the transaction’s closing, which would be triggered by the achievement of revenue targets for a total transaction value of up to $23.4bn.
The earn-out will be based on achievement of net revenue targets during the 16 quarters following the closing of the transaction and will be payable after the fourth anniversary of the closing. It includes up to $0.75bn of interest at a 4% rate, compounded annually.
It is worth mentioning that the transaction will result from the exercise at the time of closing of a put option. As part of Visa’s 2007 reorganization, Visa Inc. entered into an agreement granting Visa Europe the put option, which, if exercised, would require Visa Inc. to purchase all of Visa Europe’s outstanding capital stock from its owners in accordance with a specified timetable and for a price determined by a specific formula. In connection with the transaction announced today, the put option was amended to reflect the agreed-upon purchase price and timing, that is, they have calculated the price to lock in based on that formula. If the transaction is not completed, the put option will revert to its original terms.
Preferred stock will be convertible into class-A common stock based on certain conditions. The conversion rate will be reduced in the event that Visa Inc. suffers losses related to certain covered litigation, relating primarily to the setting of interchange rates in Visa Europe’s territory.
Post Deal Structure & Position
According to press release, Visa Inc. will establish a long-term capital structure. It intends to issue senior unsecured debt in an amount ranging between $15bn and $16bn in its fiscal first quarter of 2016, with maturities ranging between 2 and 30 years depending on market conditions. The proceeds from the debt issuance will be used to fund the cash consideration and increase the repurchase of class-A common stock outstanding in 2016 and 2017 to offset the effect of the issuance of preferred stock. After this transaction, Visa Inc.’s initial leverage is expected to be between 1.4 and 1.5 times gross debt to EBITDA and long-term leverage at between 1.1 and 1.5 times gross debt to EBITDA, maintaining flexibility to pursue future growth opportunities. Visa Inc. expects to maintain current investment credit ratings of A+ / A1, and Standard & Poor’s affirmed Visa’s debt ratings shortly after the companies announced the deal.
Visa Inc. expects the transaction to be dilutive in the short term (during year 2016) and that in 2017 the transaction to be accretive to adjusted earnings per share in the low single-digit percentage point range before onetime integration costs. Following the completion of integration, the transaction is expected to be accretive to adjusted earnings per share in the high single-digit percentage point range by fiscal full-year 2020.
Rationale
Upon the revelation of the deal, shares of Visa fell $2.36, or 3%, to $75.22, as investors digested a slightly higher purchase price than some had expected. However, this overvaluation of Visa Europe represents the strong strategic rationales behind closing a deal. First and foremost, the acquisition of Visa Europe would allow to better shore up operations and compete more effectively with that of rivals, namely Mastercard. In the slightly longer term it will allow to better protect from the onslaught of transaction startups such as Satispay, Apple Pay, or Google Wallet that seek to shake up the industry.
In addition to these considerations CEO Mr. Scharf has expressed his hopes for expansion of cashless payments in Europe. At the moment it is estimated that still 37% of European personal consumption spending occurs with cash or checks, below that of the United States where card payments are more frequent.
“We believe there is an opportunity to expand yields in Europe and we will evaluate pricing from the perspective of a commercial enterprise” rather than a bank-owned entity, Mr. Scharf also added in London.
This implies that fees will rise, to the benefit of the industry participants and to the detriment of the consumer. Indeed, it seems that the banks and Visa will seek to extract value going forward by increasing revenues and not by implementing large cost-cutting synergies. The two sister companies already share research and development as well as the visa corporate brand.
Due to the higher than expected bid, almost all shareholding banks of Visa Europe have already agreed in spirit to the deal, with only a few exceptions being made in France. In particular, Barclays, which has produced the greatest share of transaction volumes out of the 3000 shareholders, is entitled to a greater percentage of proceeds from the deal. Barclays will earn over $1.5bn, and Lloyds Banking Group stands to gain a few hundred million dollars.
Advisors
JP Morgan and Goldman Sachs are advising Visa Inc on the talks, while UBS and Morgan Stanley are advising its European counterpart.
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