UPDATE: This article, originally published at 7:38 a.m. on Wednesday, July 29, 2015, has been updated with comments from TheStreet's Jim Cramer.
NEW YORK (TheStreet) -- Visa (V) - Get Reportinvestors may get a sizeable cash return, analysts say, if CEO Charles Scharf pulls off his plan to buy former subsidiary Visa Europe for a price that may easily top $15 billion.
The payment-processor's ability to seize on global expansion opportunities has already given it a base of more than 14,000 financial institutions and 2.2 billion accounts worldwide, helping push the stock up more than fourfold to $74.74 since it went public in March 2008, compared with a more than threefold gain for rival payment-processor Mastercard (MA) - Get Report. Taking back Visa Europe would further broaden its reach, Scharf said on an earnings call.
"There is compelling logic for both Visa Inc. and Visa Europe to merge, and it's something that we would like to pursue," Scharf said. "We're targeting to resolve these discussions quickly, certainly by the end of October."
The deal is likely to be 10% to 12% "cash accretive" to earnings in the fiscal year ending Sept. 30, 2017, Lisa Ellis, an analyst with Bernstein Research, said in a phone interview. "Views vary around that by quite a bit, but I'm certainly not on the high end." The company's preferred method for returning such cash to shareholders has typically been buybacks rather than dividends, she said.
Currently, about $2.8 billion remains available from a $5 billion share-repurchase program that Visa's board approved in October, though executives said buybacks may be halted during negotiations. Visa pays a quarterly dividend of 12 cents a share, and Bloomberg analysts predict it will raise that to 13.5 cents in October. The $165 billion company, which recently announced a strategic investment in mobile-payment firm Stripe, topped analysts' profit estimates by 6% in the three months through June.
"Visa put up the best numbers in the group this quarter and a lot of that is because Charlie Scharf has his finger on the pulse of the worldwide consumer," said TheStreet's Jim Cramer, portfolio manager of the Action Alerts PLUS charitable trust. "Just look at his investment the other day in Stripe, showing how ahead of the game he is in all sorts of different payment plans. What a terrific stock to own."
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The company lost Visa Europe as a major subsidiary during a 2007 reorganization, in which the European arm became a minority shareholder, leaving Visa U.S.A., Visa International Service and Visa Canada as the parent's remaining three big earners.
"We view Visa Europe as a big deal," David Koning, an analyst with Robert Baird, said in a phone interview. "Many European banks collectively own Visa Europe, and over the years that it's been public, they haven't yet agreed on how to get a deal done, but it's pretty clear that Visa wants to. For one thing, it would add a significant portion to Visa's revenue and Visa's scale."
Although Visa would likely need to pay Visa Europe's owners a premium, it would be able to raise rates afterward to boost revenue, according to Koning. Baird maintains a buy rating on the Foster City, Calif.-based company and an $84 price target.
If the controlling banks approve, Visa Europe could exercise a put option, which uses a formula that accounts for financial performance at both the would-be acquirer and the target.
The $15 billion price tag from that option, though, is likely on the low end of a deal that could easily wind up costing $20 billion to $30 billion, especially given the CEO's determination to see it through, Bernstein's Ellis said.
With Visa's excess debt capacity of roughly $10 billion at its current credit rating, $4 billion in excess cash, and about $5 billion in excess cash expected to be generated in 2015, any deal costing more than $18 billion to $19 billion would likely require either a secondary stock offering or leaving partial ownership in the hands of the European banks, according to a recent Bernstein Research report. Bernstein maintains a "buy" rating for Visa, and raised its price target by 4% to $84 last week.
Because Visa Europe is currently owned by about 3,000 European banks that will become competitive business targets after a sale, rivals such as Mastercard (MA) - Get Report, and to a lesser extent, American Express (AXP) - Get Report also stand to gain in the short term.
"If and when Visa Europe exercises the put, in the short-term, ironically, it will be positive for Mastercard, not negative, because Mastercard will be able to pick up some of Visa [Europe's] banks, although it won't be easy," Ellis said. "Mastercard has planned call lists to knock on doors when the put is exercised because those banks that have not been available to Mastercard will now be competitively open."
While the put has existed for some time, "historically, they haven't been able to get to the minimum number of owners to begin negotiations," Andrew Jeffrey, an analyst with Suntrust Robinson Humphrey, said in a phone interview. Now, he said, "they appear to have reached something among the banks in Europe to begin negotiations."
Visa shares are up by more than 4% since Thursday's earnings call and news of the potential Visa Europe tie-up, and only a part of that gain is related to a successful fiscal third quarter, according to Jeffrey. The stock trades at a 33% premium to Mastercard, on a price-earnings basis.
A merger would put the full power of Visa's brand behind Visa Europe and allow the merged company to reduce costs by eliminating duplication, Jeffrey said. That would mean a higher profit margin on sales, which have climbed 90% to $9.47 billion in the past six years.
A particular benefit for the acquirer is that it's responsible for research and development under the 2008 separation and would be able to spread those expenses across the combined company after a deal.
"While Visa Europe has very broad latitude to use our brands and technology within its region, Visa Europe is not required to spend any minimum amount of money conducting research on brand performance, promoting or maintaining the strength of our brands," according to a regulatory filing.