Visa IPO To Launch - A Gutsy Move

Includes: MA, V
by: Ron Haruni

Despite unsteady financial markets and global liquidity issues that could eat into transaction volumes, Visa (NYSE:V) seems determined in proceeding with its plans for a public offering this week.

A gutsy move without question, particularly based on the fact that the deal is getting done in the midst of what is otherwise one of the driest IPO markets in recent years. The market certainly reflects nervousness among investors however, the company seems willing to take the gamble.

Visa is the world’s largest credit-card network, connecting banks and merchants. It makes money on each transaction made over its network.

In 2006, Visa processed almost 45 billion transactions, surpassing its three biggest competitors combined : MasterCard, American Express and Discover. During the the fourth quarter alone of fiscal ‘07, the company processed 9.1 billion transactions, printing an increase of 13% despite projection of economic slowdown. Total value of Visa transactions processed for entire fiscal ‘07 - came in at $3.5 trillion.

The company is owned by about 20,000 member banks worldwide, and offers unsurpassed acceptance around the world at more than 30 million merchants and retail outlets. Its sales volume and number of credit and debit cards in circulation is almost double that of number two - Mastercard (NYSE:MA).

Last year, in dollar terms, VISA posted over $3 trillion globally, compared to $1.9 trillion for Mastercard. Operating revenues came in at $5.2 billion for a net income topping $1 billion.

Over 60% of the credit cards in the world carry the Visa brand compared with 30% for MasterCard logo. But then again, Visa declared that it s everywhere you want to be! - Definitely, more exposure there than its rival.

The San Francisco-based company, through its IPO, could raise an estimated $18.8 billion, while offering 406 million shares at $37 to $42 each. With this move Visa will be shifting from being a privately held interest company to a publicly traded one. If there is enough demand for stock, 19 underwriters will then have the option to buy an extra 40.6 million shares.

There are positive and negative aspects in this deal that investors should consider. The card network and brand name are solidly established, however the management team is brand new since the company completed a reorganization end of fiscal ‘07:

- Since Visa is actually a merging of associations, there should be more motivation in cutting costs, especially once it becomes a public company. Cost cuts combined with healthy revenue growth could produce 20% annual gains in earnings per share, and consequently prompt operating margins to grow even further. This will allow more revenue to fall into the company’s bottom line which stimulates growth.

- There is always the risk of Visa remaining the target of a series of lawsuits and government regulations, some a decade old and some still in the works, aimed at introducing more competition to the industry. But the company will set aside $3 billion raised in the IPO to pay out settlements - which may be enough to cover losses. However, rivals continually claim anticompetitive practices and unfair dominance of the credit-card network, thus the insinuation of Visa possibly, facing more costly court fights in a cutthroat market place.

- I wouldn’t expect a spike from ticker when L2 trading, even though the IPO is reportedly oversubscribed.

- It will take some time for Visa (as with any new company) to prove itself. Even MasterCard’s IPO didn’t do that great right away. It took several earnings reports before investors gave their vote of confidence in company’s potential.

MasterCard currently trades at 25.40 times ‘08 earnings with a forward P/E of 22.00 for $7.53 p/sh projected earnings. Analysts expect MasterCard’s earnings growth to approach 20% annualized over the next three to five years.

If you’re bullish on MasterCard, there’s no reason not to feel the same way about Visa. Both companies have a powerful business which is likely to grow in future as people will continue to shift away from cash and towards payment with cards as e-commerce grows.

Visa also plans to offer an annual dividend of 42 cents a share.

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