Earlier this month, Visa Inc. announced that it had entered into an agreement to acquire Visa Europe for €21.2 billion (upfront consideration: €11.5 billion in cash and €5.0 billion in convertible preferred stock; contingent consideration: €4.7 billion). We believe this transaction makes strategic sense for Visa, and the valuation multiples were not as high as some have reported.
Nevertheless, the integration, particularly related to technology, will be challenging as reflected by the $450 to $500 million in integration costs expected over the next 5 years. In addition, the ability for Visa Europe to move from a bank-owned, cooperative pricing model to a commercial, for profit model will present challenges.
A Brief History
The transaction should not have been a surprise to anyone. Prior to Visa Inc.’s IPO in March 2008, Visa operated as a bank owned cooperative with six different regional entities. All of the regions (the United States, Canada, Asia Pacific, Latin America and Central and Eastern Europe, Middle East and Africa), with the exception of Western Europe, merged into Visa Inc. as part of the IPO.
In October 2007, prior to Visa Inc.’s IPO, Visa Inc. and Visa Europe entered into a Put-Call Option Agreement. The agreement provided Visa Inc. with a call option that was exerciseable only under limited circumstances (triggered by a decline in the number of merchants or ATMs that accepted the Visa brand within the European territory).
However, Visa Europe’s perpetual put option was subject only to a timing hold, which has long ago become effective. As a result, Visa Europe, which continued as a bank owned cooperative, was the ultimate decision-maker in regard to the timing of it’s return to the global Visa organization.
Visa Europe’s board votes every two years on the put option, and they voted against exercising their put option as recently as late 2014. So, why did they decide that now was the right time to sell?
First, Visa Inc.’s current valuation certainly helped. The exercise price under the agreement was based on multiple factors and a complex formula, however the ultimate exercise price under the agreement was dependent upon Visa Inc.’s valuation multiple applied to Visa Europe’s future financial performance. As shown in the graph below, Visa Inc.’s valuation has increased significantly since its IPO and had reached an all-time high in the 3 months preceding the transaction announcement.
Source: S&P CapitalIQ, Marlin & Associates Analysis
The strong dollar and low interest rate and strong lending environments certainly helped as well, enabling Visa Inc. to stretch the price that it was able to pay. Visa Inc., which had no debt as of September 30, 2015, will issue senior unsecured debt in an amount ranging between $15 to $16 billion in 1H 2016. Pro forma debt to EBITDA ratio is expected to be a very modest 1.5-1.7x, enabling the company to most likely maintain its current A+ / A1 credit ratings.
Third, a global Visa brand and global Visa business managed and operating with one management team and one ownership structure makes sense strategically. There are efficiencies to be gained, and a payment network benefits from economies of scale.
Another – and perhaps the strongest – reason for the transaction to have happened now can be deduced from the expected transaction synergies, as discussed by the senior management of both organizations. Visa expects $200 million in annual, run-rate pre-tax cost synergies, the majority of which are driven by technology integration.
For example, Visa Net (Visa Inc.) is a real-time network – capable of analyzing transactions and performing risk analytics as well as fraud protection in real-time. Much of Europe remains an off-line market. Visa Inc. brings real-time capabilities to Visa Europe, and the transaction prevents Visa Europe from having to duplicate the time, effort and cost of building these capabilities. In an industry that is rapidly innovating, consolidating as opposed to duplicating efforts provides significant benefits.
Last, Visa has remained somewhat tight lipped with regard to the opportunity to increase pricing in Europe, which reflects Visa Europe’s status as a member-owned enterprise. However, Visa will attempt to adopt a more commercial pricing arrangement in the region.
The earn-out structure underpinning the transaction should help their efforts, or at least help to offset any reluctance on the part of the prior Visa Europe bank owners – now the beneficiaries of the earn-out, which is based upon Visa Europe quarterly net revenue targets over the next 4 years. A marginal increase in pricing would have a material impact given the scale of Visa Europe’s business.
Source: Public filings, Marlin & Associates estimates and analysis
Note: Pro forma EBITDA excludes license fee paid to Visa Inc. and non-recurring expenses; 2015E reflects Marlin & Associates estimates
Was the Purchase Price High?
At first glance, Visa Inc. has agreed to pay up to €21.2 billion for Visa Europe’s €1.3 billion in 2014 net revenue and €463 million in 2014 EBITDA, which implies an enterprise value of 15.0x 2014 net revenue and 42.0x 2014 EBITDA. Visa Inc. has traded at an average of 12.5x LTM net revenue and 20.0x LTM EBITDA, implying a significant premium – particularly on an EBITDA multiple basis.
However, there are several factors that should be taken into account. First, Visa Europe paid a license fee of approximately €200 million per year to Visa Inc., which will not be an expense of the combined entity. Second, the Put-Call Agreement allowed an adjustment to the purchase price based on the expected cost savings from the transaction, and third, a pickup in revenue yield would have a significant benefit given Visa Europe’s more than €1.5 trillion in expected payment volume in 2015.
Source: Public filings, Marlin & Associates estimates and analysis
Note: Pro forma EBITDA excludes license fee paid to Visa Inc. and non-recurring expenses; Cost savings represents €200 million, approx. 30% of Visa Europe’s expense base; 4bps net yield increase reflects pro forma net yield of 13.2bps (30% lower than Visa Inc.)
The table above provides valuation multiples for the transaction based upon Visa Europe’s reported and pro forma metrics as well as multiples incorporating cost savings and a modest net revenue yield pickup of 4bps. Including fully phased-in costs savings, Visa Inc. has agreed to pay up to 22.5x Visa Europe’s 2014 pro forma EBITDA – reflecting a more modest premium to Visa Inc.’s own valuation.
Nevertheless, Visa Inc. has stated the purchase price under the terms of the original Put-Call Option Agreement (should the acquisition as agreed not occur and Visa Europe exercise their put under the original, un-amended terms) would likely require Visa Inc. to pay “in excess of $15 billion” for Visa Europe. $15 billion, or €13.3 billion, is significantly less than the €21.2 billion negotiated purchase price and still less than even the €16.5 billion up-front consideration in the announced transaction. Visa Inc. is paying significantly more than the Put-Call Option Agreement required.
We are available to answer any questions, and we look forward to hearing from you and hope that we can in some way be helpful in the future.