Visa Puts $800M In Escrow Account
On Tuesday, Visa Inc. (V: 76.47 +0.16 +0.21%) announced that it will deposit about $800 million to its escrow account, in order to fund its litigation costs. This action is considered equivalent to a repurchase of class B shares of the company.
Accordingly, Visa will make the deposit under its previously implemented retrospective responsibility plan (RRP), the terms of which solely affect the financials of the class B shareholders of the company. This financial impact takes place in the form of a reduction in conversion price of such class B shares into class A shares.
Apart from funding the litigation escrow account, under the RRP, such action can also be taken when Visa has to arrange funds for its U.S. financial institutions or their associates and successors.
As a result of this RRP, currently Visa has decided to fund its litigation costs through the repurchase of its class A shares worth $800 million on an as-converted basis. This is created as a back up to provide coverage and potential payment for litigation settlements in the U.S. against Visa.
This is not the first time that Visa has entered into such risk-fund back up arrangements. Visa stands as a defendant in several state and federal lawsuits filed by individuals and institutions such as interchange litigation where interchange rates are violated, currency conversion practices and pricing structure. Previously, in March 2008, Visa deposited $3 billion with a portion of the net proceeds of IPO.
Again in December 2008, the company deposited $1.1 billion into the litigation escrow account, which was followed by a $700 million deposit in July 2009 through the repurchase of 11.6 million class A shares at about $60.45 per share, thereby reducing class B share count to about 143.0 million from about 154.6 million.
Recently, in May 2010, Visa had deposited $500 million in its escrow account following the same procedure. These funds could otherwise have been used for growth purposes but litigation escrow limits the company’s liquidity and usage of funds for growth projects.
However, being a leading global operating organization, Visa is subject to increasing global regulatory focus in the payments industry. Besides, regulatory measures enacted in the U.S. in 2009 have taken effect after the U.S. financial reform Act was signed in July 2010.
Accordingly, new restrictions have been deployed on the fees card networks that charge merchants on their transactions. This would not only contract credit offerings from financial institutions but also compel the company to trim its debit/credit processing fees.
While Visa has already estimated that about 16% or less of its revenues will be affected from the adverse impact of these regulations, prime peer MasterCard Inc.(MA: 267.58 -1.29 -0.48%) is yet to assess its share of loss from the operation of the Act. However, the actual effect of these regulations will not be witnessed before mid-2011.
Overall, Visa is the global leader in the retail electronic payment network and remains well positioned to grow its revenue and earnings despite the economic hangover. However, we are concerned about Visa’s resilience and ability to raise prices and reduce expenses amid the regulatory compliances that limit the upside potential of the stock in the near term. Going ahead, any substantial payment of damages could adversely affect the financials of the company.
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