VISA IPO - Goldman Sachs Financial Institutions Group
Overview
Visa, a leading provider of credit and debit cards, plans to raise up to $10 billion in the second largest IPO in United States history. The San Francisco-based company processes more than half of all credit card transactions in the United States and has a strong global brand. Visa plans to be listed under the symbol “V,” but has not disclosed the number of shares that will be offered or the expected share price. The IPO is expected to occur near February, 2008. Goldman Sachs and JP Morgan are lead underwriters.
Demand for Visa’s stock is expected to be high because revenues are expected to increase as consumers increasingly use credit and debit cards instead of other payment methods. According to The Nilson Report, global card purchase transactions are expected to increase at a CAGR of 11% from 2006 to 2012. MasterCard Inc., Visa’s next largest rival, went public in May, 2006, raising $2.4 billion. MasterCard’s share price has increased nearly fivefold since the IPO.
Currently, Visa is primarily owned by a number of banks including JPMorgan, Bank of America, and Wells Fargo. These banks stand to reap hundreds of millions of dollars in capital gains if they sell part of their stakes. The IPO filings do not indicate if the banks plan to sell their stakes after the IPO.
As part of the IPO, Visa has restructured into Visa Inc. via mergers involving Visa USA, Visa Canada, and Visa International. Visa believes this restructuring will increase efficiency, help address current legal claims, and improve access to capital. This restructuring needed to occur before the IPO.
Strategic Rational
Proceeds from the IPO would fund Visa’s growth in a market that has become more competitive since a 2004 Supreme Court ruling stopped Visa and MasterCard’s duopoly on bank-issued creditcards. The IPO would allow Visa to invest more in new payment technologies, such as using cell phones or smart cards, which are embedded with microprocessors or memory chips and don’t require access to a remote database at the time of purchase.
Proceeds would also provide further resources for potential payment in many outstanding lawsuits against VISA, enhance VISA’s access to capital, provide resources for acquisitions, and allow for employee stock options. Stock options will provide Visa with a strong method of motivating employees, especially as employees at rival MasterCard have benefited significantly from stock options.
VISA has faced significant litigation from merchants such as Kroger, and antitrust litigation from Discover Financial Services and American Express. Visa recently disclosed that a $1.1 billion operating loss in 2007, but operating revenue rose 33 percent to $5.2 billion. The loss included nearly $3 billion in reserve for outstanding litigation. The company also disclosed it set aside $1.9 billion related to American Express litigation and a $650 million reserve related to Discover
litigation. Capital raised during the IPO will help address some of the financial limitations caused by this litigation.
The Offering
A large amount about the specifics of the offering has not yet been disclosed. Class A common stock will be offered in the IPO. In connection with the 2007 restructuring, different share classes were issued. Class B common stock is held by financial institution customers that are members of Visa U.S.A. Class C (series I) common stock is held by financial institution customers that are associated with Visa Canada and AP, LAC and CEMEA regions. Class C
(series II, III and IV) common stock is held by Visa Europe.
A portion of this class B and C common stock will be subject to mandatory redemption. Class B and C shares will become convertible to class A shares after the third anniversary of the IPO. All share classes may receive dividends, but only class A shares have voting rights. Visa will also be authorized to issue up to 25,000,000 shares of preferred stock.
Valuation
Because of Visa’s dominance in the credit and debit card industry, analysts expect the company to have a higher valuation than MasterCard following the IPO. MasterCard currently has a market cap of $23.4 billion.
Howard K. Mason, an analyst at Sanford C. Bernstein & Co., estimated Visa will be initially valued at $32 billion. This figure equals 22 times projected 2008 earnings which were calculated from the IPO prospectus. This value is half way between MasterCard’s initial valuation of 16 times and its price at the time of the report of 29 times.
Other Notable Goldman Sachs FIG Deal:
American Financial Realty & Gramercy Capital (GS advising Gramercy Capital)
Related Sites:
IPO S-1 Form Press Release
Visa Restructuring Press Release
Reuter’s Overview
SEC S-1/A & S-1 Forms (Search Company Name: Visa Inc.)
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