Deals May Strain On Refco News;

MasterCard IPO seen set to charge

Fri May 19, 2006 3:15 PM ET

By Justin Grant

NEW YORK, May 19 (Reuters) - After four decades of private life, MasterCard Inc. is expected to make its initial public offering next week, and despite some bumps, analysts see a solid debut for the world's No. 2 credit card association.

The deal has been in the making for nearly a year and could be the largest U.S. stock flotation since May 2004, when Genworth Financial Inc. (GNW.N: Quote, Profile, Research), an insurer spun off by General Electric Co. (GE.N: Quote, Profile, Research), issued 146 million shares in an IPO that raised $2.83 billion.

Purchase, New York-based MasterCard, which trails Visa, will offer up to 61.5 million shares in the IPO, a 46 percent stake that could be worth $2.6 billion.

"This is going to be a strong offering and we expect it to do well in the after-markets," said David Menlow president of IPOFinancial.com, an independent research firm based in Millburn, New Jersey.

"It's the creme de la creme. It's just a hard indicator as far as what's happening with our economy right now. ...Spend, spend, spend," said Menlow.

If the IPO prices at its forecast midpoint of $41.50, MasterCard would have an initial market capitalization of about $5.6 billion, including all Class A and Class B shares.

MasterCard is expected to price at around 11 times annualized earnings, which is low, so there could be a jump in the IPO after-market. "It has a lot of 'hair on it,'" said Francis Gaskins, president of independent research firm IPO Desktop, in a note.

"Longer-term investors are buying into the structural growth of its markets, especially overseas," said Gaskins.

The company posted a $126.7 million profit for the quarter ending March 31, nearly 36 percent higher than the year-earlier period, according a filing with the U.S. Securities and Exchange Commission. MasterCard also said it had sales of $738.5 million during the quarter, up nearly 12 percent from a year ago.

MasterCard, which is owned by roughly 1,400 banks that issue its cards, serves nearly 25,000 financial institutions in 210 countries and territories, according the filing.

The company plans to use all but $650 million of the proceeds to redeem Class B shares. What is left over will be used to defend against legal and regulatory challenges, expand geographically and into higher growth segments of the payment industry, the prospectus said.

Citigroup Global Markets Inc. and Goldman Sachs are the lead underwriters on the deal.

LAWSUITS AND OTHER ISSUES

MasterCard and the banks that issue its cards are facing law suits accusing them of conspiring to set fees which merchants pay to banks at an artificially high level.

If MasterCard is found liable in any litigation, it could force the company to alter its pricing structure or business practices, both of which could hamper its profitability, the company warns in the prospectus.

The company also said it expects to post a significant second quarter and full-year loss because it's donating about 10 percent of the stock from the share sale and $40 million in cash to a charitable foundation in Canada.

The organization is being set up to support educational programs that prepare kids for life in the global economy and develop entrepreneurship in disadvantaged areas.

MasterCard customers could also be facing higher lending fees after ratings agency Standard & Poors said it plans to lower the company's debt rating following the IPO.

Then there is the issue of trailing its larger rival, San Francisco-based Visa, which remains a non-public association of member financial institutions.

"It's in a space when not being a leader certainly counts against you," said Tom Taulli, an independent analyst and author of "Investing in IPOs," of Newport Coast, California.

"Visa is the king of the hill in this area and it's hard for a company like MasterCard to become the dominant player...I would be surprised if it had a big jump on the first day."