Visa (V) - Get Report agreed to pay as much as $23.4 billion for its former European subsidiary, enabling the credit-card processor to tap into a market that still relies heavily on cash and checks and gain an edge against rival MasterCard's dominance in the region.
The deal is valued at more than 16.5 billion euros upfront, or $18.2 billion based on current exchange rates, according to a statement on Monday. Visa Europe currently operates as a member-controlled association of more than 3,000 banks across the continent, and investors are hoping the deal will make rate increases possible.
Including a potential additional payment of 4.7 billion euros ($5.2 billion) if the merged company meets revenue targets over the next four years, the transaction seeks to take advantage of a growing move toward electronic payments. It will tap into roughly $3.3 trillion worth of European consumer transactions still handled through cash and checks, according to a statement from the Foster City, Calif.-based company.
"We will bring more competition to this market," Visa CEO Charles Scharf said on a conference call with analysts. "Our belief is there's still a tremendous amount of opportunity to electronify payments in the marketplace, and we've got a greater ability to do that as a combined entity."
The merger will give Visa an edge against smaller competitor MasterCard, which drew about 27% of its $852 billion in global purchase volume from Europe in the third quarter.
"The uniqueness of this deal lies in the fact that our two companies already work together and have done so throughout our history," said Visa Europe CEO Nicolas Huss, who will continue leading operations in the region after the merger. "We share a brand, rules and a number of operational practices."
While the company expects to be able to increase prices in Europe after the merger, it will be careful to keep rates competitive and maintain country-specific strategies to comply with differing regulations, Scharf noted.
"One of the strategic benefits of the transaction is that we will be able to deliver enhanced digital and mobile capabilities," he said.
The deal will also help Visa respond to rising demand for services that accommodate an increasingly international businesses, Huss noted.
"We're now seeing the world of payments becoming more global from consumers traveling and shipping across borders," he said.
Visa will borrow as much as $16 billion in unsecured lending to finance the transaction, according to an investor presentation. Standard & Poor's affirmed its A+ credit rating on the company, noting that although it will take on a "substantial amount of debt," Visa currently has no debt and ample borrowing capacity.
Separately, Visa posted earnings of 62 cents a share in the three months through September, its fiscal fourth quarter, trailing the average estimate of 63 cents a share from Bloomberg. Total revenue climbed 11% to $3.57 billion, as the number of processed transactions rose 8% to 18.4 billion.
The company pointed to the strong dollar as a chief driver of the lackluster earnings, as it curbed cross-border volume growth to 5% after three quarters of 8% growth.
"As has been the case for several quarters now, the strengthening of the U.S. dollar is negatively impacting key corridors," Vasant Prabhu, Visa's chief financial officer, said on Monday's call. "Specifically, outbound commerce from Russia, Canada and Brazil have deteriorated further in the past few months."
Currency exchange will likely continue to curb Visa's earnings, according to Prabhu, at least until the U.S. dollar stabilizes or weakens against overseas currencies. Cross-border growth will remain sluggish in the six months through March, he predicted.
Visa's Latin American segment was hurt the most by currency challenges, with credit and debit volumes dropping about 18% from the prior year to $227 billion, the company said.
In Visa's largest segment, the U.S., credit and debit transactions rose about 9% to $822 billion, while Central Europe, Middle East and Africa saw a 17% drop.
The company's shares dipped nearly 3% in morning trading in New York.