Visa planning largest IPO in U.S. history

By Eric Dash, Tuesday, February 26, 2008, IHT

Undaunted by recent turbulence in the financial markets, Visa, the biggest credit-card network in the United States, said Monday that it would forge ahead with what would be the largest initial public stock offering in the nation’s history.

Visa plans to sell as much as $17.1 billion of stock in late March, following in the footsteps of its smaller rival MasterCard, which went public in May 2006.

Visa and MasterCard are prospering as Americans increasingly flex plastic, rather than use cash, to pay for just about everything. The companies have not been hurt by the credit crunch, because they do not actually make credit-card loans. They merely processes transactions for banks that do.

If all goes as planned, Visa’s offering would generate a windfall for thousands of its so-called member banks, which own the company. The largest gains would go many of the nation’s biggest banks, which have been stung by losses stemming from mortgage-linked investments.

“Visa will be able to tell its story, even in an uncertain market, because its story is a good one,” said David Robertson, publisher of The Nilson Report, a payment industry newsletter. “If investors think MasterCard is a good story, Visa looks like the same thing on a bigger scale.”

Visa plans to sell 406 million Class A shares for $37 to $42 a share, with just over half going to the public and the rest to Visa’s member banks.

The first $3 billion will be placed into a special account to cover outstanding antitrust and unfair-pricing claims brought by merchants. Visa will use some of the new money to streamline its operations, expand in fast-growing emerging markets and invest in new technology like systems that enable people to make card payments using cellular phones. But the bulk of the capital will end up in the bank’s coffers, from repurchasing stock from them.

Visa’s member banks can use the extra cash.

If Visa’s shares are valued at a midpoint price of $39.50, JPMorgan Chase, the company’s largest shareholder, would receive an estimated $1.1 billion for its stake. Bank of America would get about $545 million; National City would get about $380 million; and Citigroup, U.S. Bancorp, and Wells Fargo can each expect around $240 million or more.

“The credit crunch is pretty cyclical; the prospects for Visa are very strong long-term,” said Marc Abbey, the managing partner of First Annapolis, a consulting firm that works with many banks and payments companies. “I am sure it is convenient for them to have extraordinary gains at the same time they have extraordinary losses.”

Since going public nearly two years ago, MasterCard have soared 408 percent, closing at $198.45 on Monday. It now has a market value of $26 billion.

MasterCard’s successful IPO prompted Visa to move forward with owns plans to go public. Since October 2006, Visa has reorganized its sprawling management structure, bringing together all of its global operations with the exception of those in Europe. It has also hired Joseph Saunders, the former head of Providian Financial Corporation, as its chairman and chief executive, giving him a pay package worth $11.1 million in cash for 2007. Upon completion of the IPO, he is expected to receive an additional $11.5 million in stock and options, according to Equilar, a compensation research firm.

Visa transactions accounted for roughly 66 percent of all credit and debit card purchases in the United States in 2006, compared to about 26 percent for MasterCard, according to The Nilson Report data.

Growth in card transactions, the foundation of the companies’ businesses , has historically held up well, even when the economy and consumer spending slows.

“If you look back at the last recession, card transactions did not drop ? they took a dip in growth, but they didn’t fall below prior year,” Robertson said.

“There is no reason to think that growth in the United States is going to sink Visa’s boat,” he said. “Whatever lackluster growth in the U.S. should certainly be matched and exceeded by what occurs outside the U.S.”

The prospectus for the sale lays out a convoluted capital structure, with four classes of shares, including three which go to the banks. But the deal, which is underwritten by JPMorgan and Goldman Sachs, also raises potential conflicts for the banks underwriting the shares.

Both institutions have strong ties to the financial services industry. But JPMorgan is Visa’s largest shareholder and largest customer. It is a member of the bank syndicate that agreed to lend $3 billion to the company. And it could reap more than 1.1 billion in proceeds from the IPO

Goldman, meanwhile, will serve as the “qualified independent underwriter” in setting the price of the offering, according to public filings. Its independence is not deemed in question even though Suzanne Nora Johnson, a Visa director, used to be a vice chairman of Goldman Sachs.

International Herald Tribune Copyright © 2008 The International Herald Tribune | http://www.iht.com

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