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Melding plastic

14 May 2015 By Antony Currie

It’s a good time for Visa to charge up overseas. Buying former subsidiary Visa Europe may cost the U.S. payments company as much as $20 billion, according to Bloomberg. There are plenty of reasons to act now.

The two were united until 2007. That’s when Visa decided to switch from being a bank-owned consortium to a public company. Western Europe was left to its cousin, which is jointly owned by some 3,000 financial institutions.

A reunion would give Visa 58 percent of the global credit and debit card purchase market, based on 2013 numbers from Nilson that exclude China. In theory at least, that should give it more sway over customers and firepower to battle incumbents like MasterCard and newer competitors including Venmo, Android Pay and Square.

The potential cost savings also would be enormous, in processing, clearing and beyond. The more that’s cut, the closer Visa Europe’s 26 percent operating margin would get to Visa’s 66 percent. A stronger dollar also means Visa can afford to pay some 20 percent more than a year ago.

Because of an existing put option, Visa Europe can decide when to sell. The price is set by putting Visa’s forward valuation, currently 24 times earnings, against a jointly agreed figure for Visa Europe’s sustainable net income for the coming 12 months, including some cost savings. It could be a messy negotiation. For one thing, Visa already lays claim to about a sixth of Visa Europe’s net revenue from a licensing fee.

Visa Europe’s top line grew 8 percent last year, and net income increased by a third, to $220 million. With so many moving parts, though, it’s no wonder analysts like Bernstein are publishing ranges for Visa Europe as wide as $8 billion to $46 billion.

Visa recently pegged Visa Europe’s value to be “in excess of $10 billion.” Assume Visa Europe’s bottom line grows this year at the same rate as last year, on Visa’s 24 times multiple the company would be worth $6.9 billion. That figure doesn’t take into account any savings, of course, as well as any premium that Visa would have to pay to bypass the existing agreement. The ancillary benefits for Visa, however, suggest that just as Visa boss Charlie Scharf said in April: “Sooner is better.”



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