Coverage: Visa buys Visa Europe

Visa announced early Monday morning that it would buy Visa Europe. The potential $23 billion deal had been speculated about for some time.

The Associated Press had this news blast:

Visa plans to buy Visa Europe in a cash-and-stock deal that could be worth more than $23 billion.

The global payments processor says it will pay 11.5 billion euros ($12.66 billion) in cash upfront plus stock valued at about $5.5 billion. Visa Europe could earn an additional payment valued at nearly $5.2 billion from Visa Inc. if certain revenue targets are met during the 16 quarters following the deal.

Rachel Chitra and Richa Naidu of Reuters detailed a bit more about the deal:

Visa Inc and Visa Europe, a cooperative of European banks with over 500 million cards, were part of a global bank-owned network until 2007. Most of the units merged to form Visa Inc, which went public in 2008, leaving Visa Europe as a separate entity.

The deal is expected to give Visa more scale to compete with rival MasterCard Inc.

Visa, which also released fourth-quarter results on Monday, said it authorized a new $5 billion share buyback program.

The company’s net income jumped to $1.51 billion, or $0.62 per diluted class A common share, in the quarter ended Sept. 30, from $1.07 billion or $0.43 per share.

Elizabeth Dexheimer of Bloomberg explained why Visa would want to buy its European counterpart:

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.

“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 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. Adjusted profit, which excludes some one-time items, was 62 cents a share, missing the 63-cent average estimate of 32 analysts surveyed by Bloomberg. The company also announced a new $5 billion share repurchase program.

The deal could boost earnings by as much as 5 percent, according to estimates from Donald Fandetti, a Citigroup Inc. analyst. Sanford C. Bernstein & Co.’s Lisa Ellis estimated a $20 billion transaction could increase 2018 profit by as much as 12 percent.

Jill Treanor of The Guardian described how UK banks were waiting anxiously to see how they would make out from the deal:

The owners of Visa Europe each own one share – giving them the same influence over the business – but the shares do not all have the same value. Barclays, for instance, is believed to have a stake that could be worth £1bn as a result of any deal.

Any payout to the lenders is not expected to come in one amount. A cash payment is expected to be made along with shares in Visa Inc and then further payments could be made in the future depending on the performance of the enlarged organisation.

Neither Visa Europe nor Visa Inc would comment before the results on Monday.

The UK’s new payments regulator may be watching the terms of any deal for any lock ins that might deter the banks from using other payment networks. From December, new regulations from Europe will cap the fees that can be charged on debit and credit card transactions.

The Bank of England has reportedly told Visa Europe it needs to keep a substantial presence in the UK after any takeover, according to Sky News. The company currently employs almost 1,800 people, with just over 15% outside the UK. The Bank of England refused to comment.