On Monday, Visa Inc. (V) announced that it will deposit about $400 million to its escrow account in order to fund its litigation costs. This action is considered equivalent to a repurchase of shares of the company. Meanwhile, the company used the funds allocated for the share repurchase program announced in October 2010 to raise the deposit money.
Accordingly, Visa will make the deposit under its previously implemented retrospective responsibility plan (RRP), the terms of which solely affect the financials of the company’s class B shareholders. 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 $400 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.
Such an account also protects the company’s common shareholders from direct losses. However, the details regarding the repurchase share count and price is yet to be disclosed.
This is not the first time that Visa has entered into such risk-fund back-up arrangements. Besides, 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, faulty currency conversion practices and pricing structure. Previously, in March 2008, Visa deposited $3 billion out of the net proceeds of its 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.
Last year, in May, Visa had deposited $500 million in its escrow account, which was followed by an $800 million deposit in September. 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.
Visa’s escrow account covers a settlement made in 2007 with American Express Co. (AXP), which expects it to pay about $1.12 billion in quarterly instalments of $70 million through 2011. It even covers the $1.89 billion settlement with Discover Financial Services (DFS) that was paid in 2009.
Moreover, 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 Reforms 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. 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.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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