Here is our piece on Visa (V) that was published for subscribers on 3/1. Off pricing this is a good deal and one of few in '08 to grab all allocations possible. After-market Wednesday morning I felt it opened a bit too 'hot' at $60+ in this climate and would look at a print near $50 to enter for those not allocated.
• • •
Visa plans on offering 446.6 million shares (assuming over-allotments) at a range of $37-$42. JP Morgan and Goldman Sachs are lead managing the deal, BofA, Citi, HSBC, Merrill Lynch, UBS and Wachovia co-managing. Post-ipo, V will have 849.2 million shares outstanding for a market cap of $33.54 billion on a pricing of $39.5.
If priced at $39.5, V's net proceeds (minus underwriter fees) from the ipo will be approximately $17.1 billion. V plans on utilizing ipos proceeds as follows: $3 billion placed in escrow to be used in possible litigation settlements; $10.2 billion to redeem class 'B' and class 'C' shares on ipo; $2.4 billion to redeem shares in 2008 (which will reduce overall share-count for V in '08); and the remaining $1.7 billion for general corporate purposes.
*Note - With share redemptions planned in 2008, V is forecasting a 10/08 share-count of 818 million total shares outstanding. At a price of $39.5, V will have a market cap of $32.3 billion come 10/08, assuming they fulfill their share redemption plans.
Post-ipo, JP Morgan Chase (JPM) will own 8% of V and Bank of America (BAC) will own 4%. JP Morgan Chase and Bank of America are Visa's two largest customers globally and each generates more than twice the issuing volume of Visa's next largest customer.
Until 10/07, Visa was organized into five separate entities Visa U.S.A., Visa International, Visa Canada, Visa Europe and Inovant. In 10/07, in preparation for this ipo, Visa reorganized, and all but Visa Europe came under one umbrella for the ipo Visa. Visa Europe opted to not become a subsidiary of the soon to be public V; instead remaining owned by a consortium of member financial institutions. Much of the planned share repurchased in 2008 will be shares owned by Visa Europe.
From the prospectus:
'Visa operates the world’s largest retail electronic payments network and manages the world’s most recognized global financial services brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.'
Worldwide there are an estimated 1.5 billion cards carrying the Visa brand.
The direct comparable here is Mastercard (MA). MA and V's primary competitors are large banks that utilize the payment processing platforms for consumer credit cards, debit cards, prepaid credit and commercial payments. The business driver here is the ongoing worldwide shift from paper-based payments such as cash and checks to card based and other electronic payments. These card transactions globally have grown an average of 14% annually over the past 6 years. Over the next five years annual growth is expected to be 11%, led by strong growth projected in Asia.
Revenues are generated from card service fees, data processing fees and international transaction fees. As with Mastercard, Visa does not issue cards, set customer fees or determine credit card interest rates.
Visa has three core aspects to their business: transaction processing services, product platforms and payments network management:
Transaction processing services - Routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payment acceptance services to merchants.
Product platforms - These are actual cards with the Visa logo. Visa offers their platforms to financial institutions to brand with their bank name. Visa platforms include credit cards, debit cards, prepaid cards and business cards/accounts.
Payments network management - Visa's advertising segment to promote their transaction processing services and product platforms... in other words to promote the Visa brand name.
In 2006, Visa cardholders conducted over 44 billion transactions, nearly double Mastercard's $23.4 million transactions. Total transaction volume was $3.2 billion, well above Mastercard's $1.9 billion. A key to Visa's success has been grabbing the bulk of the debit card market from the large US financial institutions. Over the past decade, as debit card use has increased annually at a rapid rate, Visa has been able to annually grow their market share in this niche.
In FY '07 Visa increased their number of transactions annually by 13%. Thus far in FY '08 that transaction growth rate has been 12%.
Thus far in FY '08, credit cards accounted for 56% of dollar transaction volume, debit cards 32% of dollar transaction volume, and commercial (and other) 12% of dollar transaction volume. In the US debit volumes have surpassed credit volumes, however credit revenues dominate in V's International segment.
Visa makes an average of $0.07 per transaction. The US accounts for approximately 66% of annual revenues with Asia/Pacific accounting for 14%.
Top five customers account for 22% of annual revenues. Largest, JP Morgan Chase accounts for approximately 7% of annual revenues.
Since 2005, there have been approximately 50 class action and individual lawsuits filed by merchants over interchange fees. Interchange fees are the fees received by issuing financial institutions when one of their cards is used in a transaction. The fee is ultimately paid by the merchant with whom the transaction took place. Visa sets default interchange fees and acts as a 'middle-man' in collection and remittance of interchange fees. The suits allege that Visa setting their own interchange default rates violate federal and state antitrust laws.
American Express (AXP) and Discover (DFS) also filed suit, against both Mastercard and Visa, claiming they restrained competition by prohibiting client banks from also offering Discover and American Express cards. In 11/07 Visa reached a settlement with American Express.
Visa is setting aside $3 billion of the ipo money for settlements and future judgments. Visa believes that insured coverage as well as the ipo money set aside will be sufficient to cover the above legal issues.
$5 per share in cash.
V intends to pay a quarterly dividend of $0.105 per share. At an annualized $0.42, V would yield 1.1% on a pricing of $39.5.
Historically, V's fiscal year has ended 6/30 annually. With the reorganization, it appears Visa has shifted their fiscal year to 9/30 annually. Financials in the prospectus have shifted to 9/30 so that is what we will go with.
Note - Much as with Mastercard, Visa does not have credit exposure. Visa derives their revenues from service and transaction processing fees. There is economic slowdown risk here as a slowing economy may mean less use of credit and debit cards. The overall organic shift to use of plastic instead of paper should mitigate some of that risk however. In addition, Visa is banking on the increased use of plastic in Asia/Pacific to fuel the majority of growth going forward.
As Visa recently consolidated their operations, historical comparisons are not valid. In the prospectus, V does break down FY '06 and FY '07 'pro forma' as if the consolidation had occurred prior to FY '06. Going back further than FY '06 doesn't offer a valid comparison on the financials here.
V had a fantastic FY '07 (ending 9/30/07). We'll look at V's financials for both FY '07 and FY '08. Note that these numbers are pro forma and take a look historically at the numbers as if V was structured then as they will be post-ipo. Also, V had a litigation settlement charge in FY '07 concerning the American Express settlement that impacted the bottom line. I folded that out as it is a non-recurring charge and only serves to cloud V's operational picture post-ipo.
FY '07 (ending 9/30/07) - V had a phenomenal fiscal year 2007. Revenues were $5.2 billion, a 33% increase over FY '06. Asia/Pacific and US debit card usage were the key growth drivers. V does issue volume and support incentives back to their financials customers and those rebates are included in the $5.2 billion number. For a middle man type business, V had strong operating margins at 29%. The Visa brand name and worldwide market leadership play into the strong operating margins. In comparison, Mastercard's operating margins for FY '07 were 25%. Plugging in full taxes, net margins were a solid 19%. Operationally, EPS was $1.23 after taxes in FY '07. **Note the actual GAAP numbers show a loss for FY '07. This is due to the American Express litigation settlement set-aside.. On a pricing of $39.50, V would trade 32 X's trailing earnings.
FY '08 (ending 9/30/08)
V's previous four quarterly revenue run rates: 3/07 - $1.19 billion; 6/07 - $1.36 billion; 9/07 - $1.46 billion; 12/07 - $1.488 billion.
The pace of V's growth has definitely slowed as the US economy has slowed in the back half of 2007. Still Visa has been able to grow quarterly sequential growth 7% in 9/07 and 2% in 12/07 amidst a more challenging environment. The growth again has been fueled by increased revenues in Asia/Pacific/Latin America and by continued shift to increased debit card usage. Those two factors should allow Visa to grow revenues in '08 even if V's US credit card segment slows.
Revenues for FY '08 should be in the $6 billion range. This would represent a solid 15% revenue increase over FY '07 and models in a very conservative figure for US revenue growth. Fueling revenues in FY '08 is a policy initiated in the second half of 2007- rolling out more aggressive fees outside the US. The new fees are specifically designed to maximize V's profit margins outside the US and look to favorably impact operating margins.
Operating margins look to increase driven by the increased non-US fees. Also, Visa has aggressively implemented an outsourcing program and significantly reduced headcount throughout 2007. Visa has a nice double-shot here of pricing power internationally while able to keep operating expenses fairly stable due to outsourcing savings. V's strong margin quarter has historically been the 12/07 quarter as they tend to put on the books heavier advertising expenses in their last quarter of the fiscal year (9/30). Still based on the 12/07 quarter, combined with recent trends, I could see V increasing gross margins in FY '08 to 34%, a strong gain on FY '07's 29%. Net margins should be 22%. Earnings per share should hit $1.60 driven by both solid revenue growth and the increased operating margins. On a pricing of $39.50, V would trade 25 X's FY '08 earnings.
A quick comparison between V and MA:
MA - $24.9 billion market cap, currently trading 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
V - On a $39.50 pricing, would have a 33.5 billion market cap and trade 25 X's FY '08 earnings with an anticipated 15% revenue growth rate.
The pricing range here is not an accident. Visa is being priced to match Mastercard's valuation. The key difference and driver here is Visa is larger than Mastercard and has a stranglehold on the important US debit card market. Visa is also being very aggressive in both Asia and Latin America. While the US economic slowdown in '08 could slow V a bit in the short term, they're positioning themselves for strong worldwide growth into the foreseeable future. A market leading brand fueled by both international growth and the shift in the US to electronic payments make 25 X's FY '08 earnings here on pricing very attractive. Visa should trade at a bit of a premium to MA in my opinion and in range it is being priced to match MA's valuation. Note too that my FY '08 V estimates are a bit conservative here due to the current cloudy US economic environment.
Blue chip ipo, strong recommend in range.