Member Banks See Windfall in Visa IPO
03/14/08 - 06:59 AM EDT
Laurie Kulikowski
The gains would provide a nice boost to capital levels, analysts say.
Using JPMorgan Chase's projected gain as a basis, Andrew Marquardt, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller, estimated that the Cleveland-based Nat City could see a 19-basis point improvement to its current Tier 1 capital of 7.99%, according to an industry note this week. Marquardt is using Tier 1 levels that have been adjusted for recent capital raises at some banks, including Nat City. On the other hand, Citi would have the least improvement to capital levels, Marquardt wrote. The New York banking titan would add just 1 basis point to its Tier 1 capital level of 8.67%. Besides the redemption of shares, Visa will deposit $3 billion of the proceeds into an escrow account to cover any legal expenses and fees pertaining to several ongoing lawsuits and its November settlement with American Express(AXP Quote - Cramer on AXP - Stock Picks). AmEx alleged that Visa, MasterCard and a host of big banks conspired to keep the company out of the bank-issued credit card business. Visa still faces a similar antitrust suit with Discover Financial Services(DFS Quote - Cramer on DFS - Stock Picks). But perhaps the biggest pieces of remaining litigation are 50 class action and individual complaints filed since 2005 on behalf of merchants against Visa, regarding so-called interchange fees. The suits allege the involvement of Visa, MasterCard and member banks in the setting of default interchange rates violated federal and state antitrust laws. The plaintiffs in the litigation are "seeking damages for alleged overcharges in merchant discount fees," Visa's filing says. More than $50 billion is at stake if the merchants are successful, according a recent article by the Legal Times on Law.com. That leaves just $3 billion of the proceeds to be used to grow the business. And there are plenty of areas to grow. Michael Kon, an analyst at Morningstar, notes many countries outside the U.S. are just beginning to convert from cash to plastic payment methods, and transactions will also start moving through mobile phones. "All of this requires a lot of investment," he says. While Visa's outlook is generally optimistic, the company isn't totally immune to downward economic trends. A significant downturn of consumer spending could take its toll on Visa and MasterCard as the two get paid through fees garnered by customer transactions. Plus it remains to be seen how Visa's remaining litigation plays out. "Obviously the timing is perfect for the [banks] because many of them need the capital, but I don't think that was the trigger for the entire process," Kon says. "The process started a few years ago when Visa U.S. started to negotiate with several Visa organizations to get together to merge and go public. The trigger for that were the legal liabilities -- the banks wanted to limit those liabilities." Banks are also eager to breathe life into the dismal IPO market this year. If Visa's IPO does well, it could encourage other companies sitting on the sidelines to enter the market, helping underwriting fees overall, observers say.
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