Visa Pays Full Price for Visa Europe

Along with its fiscal 2015 fourth-quarter results, Visa announced that it will finally acquire Visa Europe, which has continued to operate as a member association since Visa's 2008 initial public offering. Visa Europe serves a number of developed and developing markets, including Germany, Poland, the United Kingdom, and Turkey.

The long-awaited merger will geographically diversify Visa's business away from the mature North American market, which has historically made up more than half of volume and revenue. We agree that the move is strategically beneficial, but think the costs offset this in terms of shareholder value. Visa is paying at least EUR 16.5 billion in exchange for EUR 1.3 billion in 2014 net revenue and EUR 343 million in pretax profits and plans on $600 million-$650 million in closing and integration costs over time, offset by $200 million of potential annual cost savings.

We note that Visa's operating margins expanded dramatically in the years following its IPO, and management's goal of achieving margin parity over time would more than double reported operating income out of the European segment, making the price appear reasonable. We plan to raise our fair value estimate for the wide-moat firm by $1, to $72 per share.

Though the year's results were negatively affected by the strength of the U.S. dollar against various other currencies, the company still managed to generate double-digit growth (11%) in net revenue and operating income (14%). Client incentives consumed 18.3% of gross revenue as the company renewed agreements. We continue to believe the increasing bargaining power of customers will result in growing incentive payments, but think this will be offset by revenue growth and the ability to leverage other expenses.

Visa Checkout's growing acceptance at e-commerce merchants is not in itself notable, but we think the proliferation of such options may actually bolster the position of the few major networks.

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