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Visa Europe Buy, Buyback Program Are Feathers in Visa’s Cap

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Sep. 2 2016, Updated 9:04 a.m. ET

Visa Europe integration

Visa (V) completed the acquisition transaction of Visa Europe on June 21, 2016. The company realized a $1.9 billion loss related to the Visa Europe framework agreement fiscal 3Q16.[1. ended June 30, 2016]

Despite the Brexit referendum, Visa can expect a great deal of consistency in integrating Visa Europe. The company also updated its forecast on Visa Europe, expecting it to add 2%–3% to EPS (earnings per share) accretion and thus, double-digit EPS growth despite a 4% negative foreign currency impact.

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Debt funding

For the partial funding of the acquisition, Visa (V) took on $16 billion in debt. The company has a debt-to-equity ratio of 54%, higher than the industry average of 40%. The notes are issued at fixed rates of interest ranging from 1.2%–4.8%, with maturities between two and 30 years.

Visa’s management plans to raise further debt of at least $2 billion before the end of 2016. This would fund the stock buyback. as announced by the company to offset the dilution from preferred stock issued in the acquisition transaction.

The company’s management believes Visa Europe’s income will offset the debt interest for fiscal 4Q16. Visa’s management continues to see a 7%–8% net revenue growth on a constant dollar basis, even with a 3% foreign currency impact.

Balance sheet

Visa’s total balance sheet stood at $64 billion on June 30, 2016, which marked the end of fiscal 3Q16. This compares to $39.3 billion in fiscal 4Q15. The company generated free cash flows of $7 billion in fiscal 2015. Visa deploys cash for dividends, share repurchases, investments in technology, and expansion plans. Visa is also engaged in repurchasing its own shares.

Before incorporating debt for acquisition, Visa was a debt-free entity. Here’s how some of Visa’s peers in the payment-processing industry have fared with their leverage figures in the last fiscal year:

  • Mastercard (MA): 22%
  • American Express (AXP): 513%
  • Discover Financial Services (DFS): 203%

Together, these companies account for 2.3% of the Technology Select Sector SPDR ETF (XLK).

Visa had cash, cash equivalents, and available-for-sale investment securities of $12.4 billion on June 30, 2016. As a result of the Visa Europe acquisition, Visa expects to take a restructuring charge in fiscal 4Q16 to resize its global cost structure.

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Repurchase program extension

Visa (V) announced a new $5 billion share repurchase program, which increases the total available for share repurchases to $7.3 billion. Visa has been buying its stock back at an accelerated pace for the past two quarters in anticipation of the transaction’s closing.

Visa plans to continue buying at this pace until it has repurchased sufficient stock to offset the impact of preferred stock issued to Visa Europe members. The company’s management expects the buyback program to be completed by the end of fiscal 1Q18.

During fiscal 3Q16, Visa repurchased 21.7 million units of common stock at an average price of $77.53 per share, using $1.7 billion of cash on hand. In the fiscal year-to-date through June 30, 2016, the company repurchased 71.6 million units of its common stock at an average price of $76.09 per share, using $5.5 billion of cash on hand.

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