Visa Agrees to Buy Visa Europe for as Much as $23.4 Billion

Visa Agrees to Buy Visa Europe for as Much as $23.4B
  • Deal includes upfront consideration of $18.2 billion
  • Earnings miss estimates by 1 cent, company announces buyback

Visa Inc., the world’s largest payments network, agreed to acquire Visa Europe Ltd. in a deal valued at as much as 21.2 billion euros ($23.4 billion) to unify the brand globally after eight years as separate companies. Visa shares fell in New York.

The transaction includes 16.5 billion euros upfront and as much as 4.7 billion euros more after the fourth anniversary of the deal’s completion, the firms said Monday in a statement. The purchase ends years of speculation among analysts about whether the companies, which split in 2007 ahead of the U.S. firm’s initial public offering, would reunite.

The lack of meaningful contributions to earnings from Europe has long been seen as a weakness for Visa and an advantage for smaller competitor MasterCard Inc., which owns its European business. Foster City, California-based Visa relies more on the U.S., which accounted for 54 percent of revenue in fiscal 2014, compared with 39 percent for MasterCard.

Debt Issuance

“This transaction is beneficial for financial institutions, acquirers, merchants, cardholders, and other partners, as well as for our employees and shareholders,” Chief Executive Officer Charlie Scharf, 50, said in the statement.

Visa plans to issue $15 billion to $16 billion in debt to help fund the deal, which is expected to be completed in the fiscal third quarter that ends June 30, according to the statement. The acquisition, which is subject to regulatory approval, includes 11.5 billion euros of cash upfront and 5 billion euros of stock. The additional 4.7 billion euro payment is contingent on achieving net revenue goals in the 16 quarters following the deal’s completion.

Visa Europe is owned by more than 3,000 banks. Chirantan Barua, an analyst with Sanford C. Bernstein, said British lenders including Barclays Plc, Royal Bank of Scotland Group Plc and HSBC Holdings Plc should initially benefit.

‘Free Lunch’

“Although we see this as a positive in the short term for the U.K. banks as this represents a boost to capital, we do not see this as a free lunch,” Barua said in a note to clients. The British banks “will see their fee income margin start to be squeezed and we wouldn’t be surprised if Visa tried to increase the margins in Europe at the expense of the banks.”

Visa also reported that fiscal fourth-quarter profit rose 41 percent to $1.51 billion, or 62 cents a share, from $1.07 billion, or 43 cents, a year earlier, when it took a $283 million charge for litigation expenses. That was one cent below the average estimate of 32 analysts surveyed by Bloomberg. The company also announced a new $5 billion share repurchase program.

Visa shares fell 2.7 percent to $75.47 at 10:11 a.m., the worst performance in the 70-company Standard & Poor’s 500 Information Technology Index. Goldman Sachs Group Inc. said in a note to clients that Visa’s earnings forecast for the current fiscal year is “slightly disappointing.”

Fiscal Forecast

Visa forecast that fiscal 2016 net revenue growth will be in the “high single-digit to low double-digit range" and that adjusted earnings per share growth will be “low-end of the mid-teens range." The financial outlook doesn’t include the Visa Europe transaction. 

Revenue in the fourth quarter rose 11 percent to $3.57 billion, matching analysts’ estimates. Customer spending climbed 8.7 percent in the U.S. and 0.6 percent in Asia, not adjusting for currency fluctuations, while spending decreased in regions including Latin America.  A strengthening U.S. dollar has crimped earnings abroad, and the company expects that currency will have a negative impact of 3 percent on revenue growth next year. Revenue for the full fiscal year rose 9.3 percent to $13.9 billion. 

A combination may bring short-term risks to Visa and benefit MasterCard, according to analysts including Chris Hickey of Atlantic Equities. Visa probably will raise prices after a deal is completed and it could be disruptive as the U.S. company integrates operations with its European counterpart, Hickey said before the deal was announced. MasterCard also stands to gain market share by picking up business from European banks that were previously tied to Visa, Lisa Ellis, a Bernstein analyst, said before the deal was completed.

Visa Europe managed more than 500 million accounts and processed more than 16 billion transactions last year, according to its annual report. It earned 219.8 million euros in 2014, up 29 percent from a year earlier.

(An earlier version of this story corrected the spelling of Chirantan Barua’s last name.)

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