Visa Europe

Topics: Revenue, Debit card, Credit card Pages: 29 (11117 words) Published: June 1, 2015
This document is being provided for the exclusive use of ASHISH KOCHAR at THREADNEEDLE ASSET MANAGEMENT LTD
May 15, 2015

Lisa D. Ellis (Senior Analyst) • lisa.ellis@bernstein.com • +1-212-756-1855 Harshita Rawat, CFA • harshita.rawat@bernstein.com • +1-212-969-6228 Zhe Shen • zhe.shen@bernstein.com • +1-212-823-3627

Visa-Visa Europe: Answers to the Top 25 FAQs, Including our
Accretion Math and Deep Dive on Yields

Ticker
MA
V
SPX

Rating

CUR

O
O

USD
USD

13 May 2015
Closing
Price
92.52
68.65
2098.48

Target
Price

TTM
Rel.
Perf.

108.00
77.00

13.1%
18.9%

EPS

P/E

2014A

2015E

2016E

2014A

2015E

2016E

Yield

3.10
2.16
116.15

3.33
2.64
117.59

4.22
3.07
132.68

29.8
31.9
18.1

27.8
26.0
17.8

21.9
22.4
15.8

0.5%
0.7%
2.0%

O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated

Highlights

U.S. Computer Services & IT Consulting

Investor interest in the Visa Europe put option has, not surprisingly, dramatically intensified since Bloomberg reported last Friday that Visa Inc. and Visa Europe are actively engaged in discussions about a possible sale.

As a follow-up to our May 8 note (see link: Visa-Visa Europe: Price Tag Could be >$20 B, Good for Visa Regardless (It Is All About Yields), + Details of the Put Option), today we address the top 25 questions we've received from investors over the past few days, covering topics including estimated EPS accretion, why we believe Visa Inc. can raise yields, why there may be cost dis-synergies not synergies, the impact of the recent European payments regulation, and how market share dynamics in Europe might change if a deal occurred.

A few key messages before we dive into the detail:
We estimate '17 cash EPS accretion would be ~10-12% for Visa Inc. if the put option was exercised at a $20 B price, or ~ 35 cents on our forecasted FY17 EPS of $3.55 (Exhibits 1 and 2) We believe Visa Inc. could pay $20+ B for Visa Europe – we assume $20 B in our accretion estimates. The major source of value for Visa Inc. would be yield, not cost. Visa Europe's yields are 9 bps. Visa Inc's are 3x higher, at 26 bps, and MasterCard's European yields are 2-2.5x as high, at an estimated 18-23 bps (MA's non-U.S. yields are 27 bps). We assume 18-20 bps in our accretion estimates (Exhibits 3-8) We believe Visa Inc. could raise yields because: a) MasterCard's yields in Europe are 2-2.5x Visa Europe's (we estimate ~18-23 bps, Exhibits 9 and 10), b) Visa Europe's yields are low because of its ownership structure – owned by its customers, and largely treated as a shared utility/cost center, c) Visa Inc. has a track record of successfully raising yields: Visa Inc.'s ROW yields were 14 bps in 2006, and are now 26 bps, d) interchange caps, like those going into effect in Europe, do not impact network fees We believe there may be cost dis-synergies, not synergies, despite the elimination of the royalty fee that Visa Europe pays Visa Inc., because a) Visa Europe' cost structure is already 30% lower than Visa Inc.'s (Exhibit 6), b) since Visa Europe is currently run in a 'share utility' model, it is likely underinvested in areas like sales/account management, and c) Visa Inc.'s cost structure has not historically demonstrated meaningful scale, e.g., when Visa Inc.'s volumes increased 50% from 2010 to 2014, Visa Inc. only garnered ~ 4 ppt of operating margin expansion due to scalability (opex increased ~10% CAGR from 201014 vs. revenue growth of 12% CAGR).

See Disclosure Appendix of this report for important disclosures and analyst certifications.

This document is being provided for the exclusive use of ASHISH KOCHAR at THREADNEEDLE ASSET MANAGEMENT LTD
May 15, 2015
Lisa D. Ellis (Senior Analyst) • lisa.ellis@bernstein.com

• +1-212-756-1855

We believe the exercise of the put option could create a near-term opportunity for MasterCard to gain share in the region, as the change of control...
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