Visa Inc. and Visa Europe Ltd. announced a definitive agreement for Visa Inc. to acquire Visa Europe, creating a single global company. The transaction consists of upfront consideration of €16.5 billion with the potential for an additional earn-out of up to €4.7 billion payable following the fourth anniversary of closing, for a total value of up to €21.2 billion.
The upfront consideration comprises €11.5 billion of cash and preferred stock convertible into Visa Inc. class A common stock valued at €5 billion.1 Both companies’ boards were unanimous in their support of the transaction. The transaction is subject to regulatory approvals and is expected to close in Visa Inc.’s fiscal third quarter of 2016.
As a result of the combination, European clients will have greater access to Visa Inc.’s scale and resources and global clients will have a more seamless experience. Additionally, European clients will benefit from direct access to Visa Inc.’s investments in innovative technology and differentiated products and services.
Visa Europe, an association owned and operated by member banks and other payment service providers, is the payments leader in Europe. At the end of fiscal full-year 2015, there are more than 500 million Visa cards issued across Europe. The association is responsible for more than €1.5 trillion in payments volumes, processes over 18 billion transactions annually, and partners with approximately 3,000 financial institutions in 38 countries.
The transaction will position the combined business to take advantage of a significant growth opportunity. In Europe an estimated 37 percent, or USD $3.3 trillion, of personal consumption expenditure is still done via cash and check. Europe has also been an early adopter of mobile payments, which analysts predict will see strong growth in the future given the widespread availability of Near Field Communication technology. Visa Inc. has aggressively launched new mobile payment partnerships, platforms and products that will enable faster growth and adoption of mobile payments in Europe. This includes new tokenization services, support for digital wallets and wearables, strategic investments in other enabling technologies, ecommerce and P2P payment capabilities, as well as the opening of several global innovation centers.
Deal Structure and Terms
Under the terms of the transaction’s definitive agreements, Visa Inc. will acquire Visa Europe for upfront cash consideration of €11.5 billion and preferred stock convertible into Visa class A common stock valued at €5 billion.1 In addition, Visa Europe members could potentially receive an earn-out cash payment of up to €4.7 billion including interest for a total transaction value of up to €21.2 billion. The earn-out will be based on achievement of net revenue targets during the 16 quarters following the closing of the transaction and will be payable after the fourth anniversary of the closing. It includes up to €0.7 billion of interest at a 4% rate, compounded annually.
The transaction will result from the exercise at the time of closing of a put option. As part of Visa’s 2007 reorganization, Visa Inc. entered into an agreement granting Visa Europe the put option, which, if exercised, would require Visa Inc. to purchase all of Visa Europe’s outstanding capital stock from its owners in accordance with a specified timetable and for a price determined by a specific formula. In connection with the transaction announced today, the put option was amended to reflect the agreed-upon purchase price and timing. If the transaction is not completed, the put option will revert to its original terms.
The preferred stock will ultimately be convertible into class A common stock subject to the satisfaction of certain conditions. Similar to Visa Inc.’s existing class B common stock, the conversion rate will be reduced in the event that Visa Inc. suffers losses related to certain covered litigation, relating primarily to the setting of interchange rates in Visa Europe’s territory.
Transaction Financing
In conjunction with the transaction, Visa Inc. will establish a long-term capital structure. Visa Inc. intends to issue senior unsecured debt in an amount ranging between USD $15 and $16 billion in its fiscal first quarter of 2016, with maturities ranging between 2 and 30 years depending on market conditions. The proceeds from the debt issuance will be used to fund the cash consideration and increase the repurchase of class A common stock outstanding in 2016 and 2017 to offset the effect of the issuance of preferred stock. Visa Inc.’s initial leverage is expected to be between 1.4 and 1.5 times gross debt to EBITDA and long-term leverage at between 1.1 and 1.5 times gross debt to EBITDA, maintaining flexibility to pursue future growth opportunities. Visa Inc. expects to maintain current investment credit ratings of A+ / A1.
Financial Implications
Visa Inc. expects the transaction to be dilutive to fiscal full-year 2016 adjusted earnings per share in the low single-digit percentage point range due to a number of factors, including the issuance of the preferred stock, the timing of share repurchases of class A common stock, and the issuance of debt relative to the timing of the close. Benefits from revenue synergies, cost savings, and increased repurchases of class A common stock will begin to accrue in fiscal full-year 2017, and Visa Inc. expects the transaction to be accretive to adjusted earnings per share in that fiscal year in the low single-digit percentage point range before one time integration costs. Following the completion of integration, the transaction is expected to be accretive to adjusted earnings per share in the high single-digit percentage point range by fiscal full-year 2020.
Upon closing the transaction, Visa Inc. expects one-time transaction costs of approximately USD $150 million including stamp duties to be incurred in fiscal full-year 2016. Cumulative integration related costs are expected to be approximately USD $450 million to $500 million through the end of fiscal full-year 2020. Approximately USD $200 million in pre-tax cost savings are expected annually, largely realized by the end of fiscal full-year 2020.
