Thursday, October 04, 2007

4 Banks to Gain from Visa Restructuring

RBC Capital Markets, 4 October 2007

Visa Inc. announced yesterday that it completed a restructuring whereby members would receive shares in Visa Inc. An initial public offering is expected to follow.

CIBC, Royal Bank, TD Bank and Scotiabank announced they they expect to record gains in Q4/07 as a result. Bank of Montreal and National Bank are Mastercard issuers, and should not benefit from the Visa restructuring (they booked gains in 2006 following the restructuring of Mastercard).

We expect the gain to be most material to CIBC, as it is the leader in credit card market share and has the smallest market capitalization.

Lehman Brothers provided a fairness opinion of the value to be received by each Visa entity or member bank. Lehman came up with a valuation range of US$33.9 billion to US$42.3 billion for all of Visa Inc., using both comparable transaction and discounted cash flow methodologies. The share ownership of Canadian members is estimated to be about 2.8%.

We estimate combined after-tax gains of $626 million to $818 million for Canadian Visa issuers, split as follows: 37% CIBC, 29% Royal Bank, 15% TD and 11% Scotiabank. Other Visa issuers in Canada should own approximately 8% of the Canadian allocation, and include Desjardins, Laurentian Bank, Bank of America, Home Trust, JP Morgan Chase Bank, US Bank of Canada and Vancouver City Savings Credit Union.

The main assumptions in our estimates are as follows: (1) the book value on the Canadian banks' books is nil; (2) the tax rate on the gain will be 35%; (3) the valuation banks use is in line with Lehman's fairness opinion (an independent valuation has not been completed yet); (4) the Canadian dollar will be at par with the US dollar; and (5) ultimate ownership will be in line with the estimated ownership given in Visa's regulatory filings (they may change depending on contribution to 2008 earnings).
Reuters, 3 October 2007

Four Canadian banks said Wednesday that they expect to post fourth-quarter gains reflecting the restructuring of credit card company Visa Inc., but they did not say how large the gains might be.

Canadian Imperial Bank of Commerce,Toronto-Dominion Bank, Royal Bank of Canada and Bank of Nova Scotia said they will receive Visa shares for their interests in Visa Canada Association.

The restructuring of Visa, the world's largest credit card network, closed Wednesday and the company plans to go public next year.

CIBC said it expects to book a “material gain” because of its “leadership position” in the Canadian credit card market, but said the exact amount has yet to be finalized.

Visa Canada, Visa U.S.A. and Visa International have become subsidiaries of Visa Inc., based in San Francisco.

Independent valuations of the Canadian banks' Visa stakes are under way, they said.

The banks' fiscal fourth quarters end on Oct. 31.

TD Bank expects to release quarterly results on Nov. 29, while Royal Bank plans to issue its results on Nov. 30. CIBC and Scotiabank will release their numbers on Dec. 6.

Last year, Bank of Montreal and National Bank of Canada recorded gains resulting from the initial public offering of MasterCard.
Bloomberg, David Mildenberg, 3 October 2007

Visa Inc., the world's largest credit-card network, won approval from its member banks to restructure the company before next year's expected initial public stock offering.

Visa will combine its U.S., Canada and international units into a single-stock corporation, the company said in a statement today. London-based Visa Europe will remain a membership association and become a licensee and minority investor in San Francisco-based Visa Inc. after its members on Sept. 27 approved a split.

The Visa network, which processes transactions for banks and credit unions that issue debit and credit cards, has been growing as consumers shift to cards from cash and checks. Last year the company said it planned to combine most of its global businesses and sell shares in 2008 to become more competitive.

``The completion of the restructuring marks a pivotal moment,'' Visa's Chief Executive Officer Joseph Saunders said in the statement. ``We will approach the opportunities ahead in a stronger position than before.''

Mastercard Inc., the second-biggest card company, has risen fourfold in New York Stock Exchange trading since its May 2006 debut. Second-quarter profit excluding one-time items almost doubled to $195 million, or $1.43 a share, though the company beat analysts' estimates by the smallest margin since the IPO.

Visa's value is estimated at $33.9 billion to $42.3 billion, according to a Lehman Brothers analysis included in a regulatory filing last month. The organization is owned by about 16,400 financial-institution customers as of March 31, the company said in the filing. The U.S. Securities and Exchange Commission approved Visa's restructuring on Sept. 13.

The restructuring and eventual IPO are likely to produce one-time gains for member banks. Visa's largest customer, JP Morgan Chase & Co., accounted for 10 percent of Visa's $3.7 billion in revenues in the nine months ending June 30, according to Visa's Sept. 13 regulatory filing.

Four Canadian banks including Canadian Imperial Bank of Commerce, TD Bank Financial Group, Bank of Nova Scotia and Royal Bank of Canada, said today they expect to record undisclosed gains during the fourth quarter from exchanging their interests in Visa Canada Association for Visa Inc.

European regulators fined Visa $14 million today for blocking competition by refusing to let Morgan Stanley offer card services. Visa had barred Morgan Stanley from its system until last year because the second-largest securities firm owned the competing Discover card in the U.S.

Visa Europe said it will appeal the ruling and noted that it settled a lawsuit over the issue with Morgan Stanley last year. Morgan Stanley in June spun off Discover, the fourth- largest U.S. card network.

Visa spokesman Paul Cohen declined to comment on today's announcement.