Visa, the global payments technology giant, has long been committed to “unlocking opportunity for everyone.” However, the company recently faced a challenge that caused its stock price to drop. This unexpected twist also created a potential buying opportunity for astute investors.
The story revolves around Visa’s rather complex share structure. In addition to the standard Class A shares, there are also nontraded B shares held by U.S. banks and C shares owned by foreign banks.
To understand the origins of this unusual arrangement, we need to go back to Visa’s IPO in 2008. At that time, concerns arose due to a lawsuit alleging that Visa and affiliated banks had collectively conspired to artificially inflate transaction costs. In response to this legal threat, Visa introduced the B shares. These shares were designed to protect shareholders from the potential financial impact of the lawsuit. Notably, these B shares cannot be sold until all claims from the lawsuit are resolved.
Fast forward to the present day, and Visa believes that the time is ripe for a change. As of August 31, the B shares were collectively valued at an impressive $96 billion, a significant increase from their initial issuance value of $8 billion. Furthermore, Visa states that approximately 90% of the claims from the 2005 lawsuit have been settled. The remaining claims are estimated to cost between $1.4 billion and $4 billion, but Visa still has $1.6 billion in its litigation escrow account. Given these favorable circumstances, Visa is now looking to amend the agreement regarding the sale of B shares.
Under Visa’s proposed plan, participating banks would have the option to convert half of their B shares into C shares and the other half into newly created B-2 shares. The C shares could then be sold according to a predetermined schedule. On the other hand, the B-2 shares would closely resemble the original B shares, but with double the coverage for potential losses. It is important to note that this proposal will be subject to a future vote by all shareholders.
Visa’s innovative proposal seeks to balance the interests of its stakeholders while ensuring a more seamless and efficient process for the sale of B shares. By doing so, the company aims to create a stronger foundation for future growth and success.
In an ever-evolving financial landscape, Visa continues to demonstrate its commitment to unlocking opportunity and adapting to meet the changing needs of its shareholders. The forthcoming vote will be a pivotal moment as the company charts the course for its future, in pursuit of unlocking even greater opportunities for all.
Visa’s Proposal: A Win-Win for Investors
In a recent call explaining their proposal, Visa presented compelling reasons why investors should embrace the deal. The proposal offers Class A and C investors the reassurance of financial protection, while also providing clarity on the sale of Class B shares in the future. Visa CEO Ryan McInerney highlighted that the proposal would reduce potential risks associated with the current structure, simultaneously giving Class B stockholders the option for immediate liquidity and potentially better regulatory capital treatment.
Despite the sound reasoning behind the proposal, the market has expressed concerns. Following the announcement of the exchange offer, Visa’s stock experienced a 2.6% decline on Thursday, marking its largest drop since May. Investors seem apprehensive about the possibility of more shares flooding the market. Jefferies analyst Trevor Williams estimates that if approved, the proposal would add approximately $350 million in daily volume to the current $1 billion, a figure he considers significant.
Williams writes, “We anticipate investors to exhibit short-term skittishness due to potential coordinated selling pressure during the lockup period if the proposal is approved.” However, Visa shareholders should ultimately find solace in this arrangement. It offers a short-term overhang as a substitute for a longer-term one, all while maintaining Visa’s unchanged fundamentals.
When our analysts recommended buying Visa shares nearly 11 months ago, it was because the company continued to generate free cash flow, had no net debt, and was experiencing double-digit growth in both sales and earnings. Although the stock has soared approximately 36% since our initial recommendation, these key fundamentals have remained consistent.
As Visa’s stock experiences this temporary decline, it presents investors with another golden opportunity to buy shares at a discounted price, if they choose to do so.