Visa's Planned IPO Likely To Be Largest For A U.S. Launch

BY AMY REEVES

INVESTOR'S BUSINESS DAILY

Posted 2/25/2008

After spending much of the winter in near-hibernation, the IPO market was jolted awake Monday when Visa announced the biggest offering in U.S. history.

The credit card giant decided to sell 406 million shares at $37 to $42 apiece, raising $15 billion to $17 billion. Underwriters will have the option to buy an additional 40.6 million shares, pushing the total haul as high as $18.8 billion.

Barring a drastic price cut, that will beat AT&T Wireless' $10.6 billion take in April 2000.

At the high end, Visa's IPO could be the world's second largest ever, behind Industrial & Commercial Bank of China's $21.9 billion launch in 2006.

The exact date for Visa to go public hasn't been set, but Renaissance Capital's IPOhome.com has put it on the calendar for the week of March 17.

It would be an anomaly in the current IPO market. Only half as many IPOs have come out this year as in the first two months of 2007. None raised more than $800 million, and only four of 18 are trading above their offering price.

Tom Taulli, author of "Investing in IPOs," thinks Visa is a special case. "This is one of those cases where we have an exceptional company that could probably come out in any market," he said. "For the IPO investor, there's nothing to read into it in terms of the market coming back."

How exceptional is it? Visa is the last of the big credit card companies to hit the market, now that Discover, (DFS) American Express (AXP) and MasterCard (MA) are all trading.

The last of that bunch piques the most interest. MasterCard priced at 39 in May 2006 and is trading near 200. It's even gone up since the credit crunch last summer. This is partly because MasterCard handles transactions and doesn't actually have to take on consumer debt, Taulli says.

But there are also skeptics.

"Is this another MasterCard?" asks Francis Gaskins, president of IPO Desktop. "The answer is no."

MasterCard went public at a price-to-earnings ratio of 11, while Visa's proposed price puts it at around 30, says Gaskins.

Taulli says the Visa offering's sheer hugeness comes partly from MasterCard's success, which Visa no doubt factored into its terms. That might not leave much room for growth in the aftermarket.

Another problem is apparent in Visa's financials. In its original November prospectus, it recorded a decent profit for the first three quarters of 2007.

Now that it's reported the full year, it's suddenly in the red.

The difference is a legal settlement it reached with AmEx last fall. Visa agreed to an initial payment of $1.13 billion, and will pay up to $70 million per quarter for the next 16 quarters.

Litigation, in fact, fills up a fair chunk of Visa's prospectus. Visa is a defendant in class-action lawsuits over interchange fees, a federal antitrust suit and a variety of state-level cases alleging consumer protection violations, illegal currency conversion and so on.

The company has decided to put $3 billion of the proceeds in escrow for its "retrospective responsibility plan," i.e. future legal payouts. It also says that in the first quarter of this year it expects litigation costs to reach $285 million.

Still, MasterCard has been dealing with many of the same charges, and investors don't seem to care. And Visa's basic business metrics, such as transaction volume, are growing at a fair clip, especially outside the U.S.