Visa Inc. will be paying more upfront cash to acquire Visa Europe Ltd., and it paid more in client incentives in the quarter ending March 31. But the leading payment card network still managed to turn a tidy profit and saw double-digit increases in U.S. transaction volumes even though volume growth weakened elsewhere in the world.
Visa has a pending $23.4 billion deal to buy its former subsidiary, London-based Visa Europe. To allay concerns of European Commission regulators, Visa Inc. reported Thursday that it is dropping the so-called earn-out provision of the deal and replacing it with nearly $2 billion in cash for Visa Europe’s bank owners.
The earn-out was valued at up to $5.2 billion when the deal was announced last November and would have been paid over four years, depending on Visa Europe meeting certain revenue targets. Now, under a preliminary agreement, Visa Inc. will pay €1.75 billion ($1.98 billion) in cash—€750 million ($846 million) payable when the deal closes later this year, and another €1 billion ($1.13 billion) plus 4% compound annual interest, payable on the third anniversary of closing.
Visa Inc. chief executive Charles W. Scharf told analysts at a late-afternoon conference call to review the company’s financial results for the second quarter of fiscal 2016 that the deal still needs final regulatory sign-off and will close later than originally planned, but he expressed optimism that it will go forward.
“We think this is a good outcome for both parties,” he said, adding that “transition planning is well under way.”
Visa in December took on $16 billion in long-term debt to finance the deal, which accounted for most of the company’s $132 million in interest expense for the quarter. A year earlier, Visa’s interest expense was a paltry $7 million.
Meanwhile, Visa paid out $789 million in client incentives in the second quarter, up 17% from $676 million a year earlier. Visa and MasterCard Inc. pay such incentives to issuers to pump out cards with their brands, and to merchants to boost acceptance. An undisclosed portion of Visa’s second-quarter increase came from its new acceptance deal with Costco Wholesale Corp., which is dropping American Express Co., and the pending conversion of USAA’s big MasterCard portfolio to Visa.
While higher, Visa’s incentives are still running within the company’s guidance, chief financial officer Vasant Prabhu said.
In a followup to Visa’s update earlier this week on the rollout of EMV chip cards in the U.S., Scharf said that more than 1 million merchants, about 20% of the U.S. card-accepting base, have chip card readers. “Based on client surveys, we expect 50% of merchant locations will be enabled with EMV by the end of calendar year 2016,” he said.
The strong U.S. dollar as well as weak commodity prices in many countries hurt Visa charge volumes in much of the world, but U.S. credit and debit card payment volumes both rose 11% from fiscal 2015’s second quarter. Debit card spending hit $360 billion while credit card payments totaled $334 billion. Worldwide processed transactions on the VisaNet network increased 9% to 18.5 billion.
Visa reported net income of $1.71 billion, up 10% from a year earlier, on operating revenues of $3.63 billion, up 6%. The fee to merchant acquirers for signature debit transactions will increase in July by 2 basis points (0.02%), but Prabhu said the fee increase is not “anywhere close to the price increase we took last year.”