Member Banks See Windfall in Visa IPO

Visa's initial public offering next week could raise up to $18 billion, but the real winners stand to be its member banks and underwriters.

In a worrisome U.S. economic environment, the banks stand to make a tidy sum selling shares back to the San Francisco-based credit card payments company. Banks struggling to maintain capital levels as the credit crunch holds tight and losses from residential mortgage loans intensify especially welcome the opportunity.

And while some market participants have expressed doubt that the IPO could live up to its lofty expectations in a down market, the more than 40 underwriters -- many of them the same banks expected to record large gains from the IPO -- are doing all they can to make sure the deal is successful.

Fee Fight May Trim Visa's IPO Gains

The banks "certainly have a lot of interest in it going public," says Nicholas Einhorn, research analyst at Renaissance Capital, which runs the Web site IPOhome.com. "If there are liquidity issues at these bigger banks they have a lot of interest in pushing it out sooner. Because they basically own the whole company they have a lot of say in when Visa goes public."

Visa has more than 16,000 financial institution customers and operates the world's largest electronic payments network. The company, like rival MasterCardMA, which had its own successful IPO in 2006, makes its money on transaction fees and does not hold customers' credit card debt on its balance sheet, making it an attractive property during the credit crunch.

Prior to a restructuring completed last year, Visa was organized as multiple associations by country. So-called member banks owned shares in the various associations. It now operates under one holding company with the exception of Visa Europe.

Visa, which will trade under the ticker symbol "V," plans to sell 406 million Class A shares at $37 to $42 a pop, according to a filing with the Securities and Exchange Commission. The proceeds from the IPO could top $18 billion, if shares of Visa are priced at the very top of the indicated range. The company is expected to price shares after the market closes on Wednesday and begin trading on Thursday, observers say.

While the proceeds expected from the deal are gargantuan, Visa itself will only see a small portion.

Visa plans to use about $10 billion of the IPO proceeds to redeem shares owned by the so-called member banks. The largest owners -- JPMorgan ChaseJPM, Bank of AmericaBAC, National CityNCC, CitigroupC, U.S. BancorpUSB and Wells FargoWFC -- plan to initially sell about 30% of their stakes.

JPMorgan Chase -- one of Visa's largest customers along with BofA -- said it expects a gain of roughly $1.2 billion before taxes in the first quarter. Charlie Scharf, Chase's head of retail, is also on Visa's board of directors.

Bear Stearns analyst David Hilder estimates that BofA would have an initial gain of $545 million, if the stock is priced at $39.50 (minus fees), the midpoint of the $37 to $42 a share price range Visa indicated. Under these terms, Nat City would get a boost of $380 million, while Citi would have a gain of $261 million, Hilder says. Two other large banks -- U.S. Bancorp and Wells Fargo stand to gain $241 million and $238 million, respectively, according to a recent note.