motto is “unlocking opportunity for everyone,” but an attempt to unlock value for certain holders of its stock caused its share price to fall on Thursday—and created a buying opportunity.
The story is, well, complicated. Visa (ticker: V), which went public in 2008, has an odd share structure. It has your normal, run-of-the-mill Class A shares, but also nontraded B shares, which are held by U.S. banks, and C shares, which are owned by foreign banks.
The B shares were created at the time of Visa’s IPO to insulate shareholders from a 2005 lawsuit alleging that the company—and banks that issued Visa-affiliated credit cards—had conspired to increase the cost of transactions by making the holders, as well as the company, responsible for damages. According to the original documents, the shares can’t be sold until all the claims from the lawsuit are settled.
Visa, though, thinks now is a good time to change the agreement. The B shares were worth a total of $96 billion on Aug. 31, the company said, up from $8 billion when they were issued, and 90% of the 2005 claims are now settled, according to Visa. The remainder would likely cost between $1.4 billion and $4 billion, with Visa still having $1.6 billion left in its litigation escrow account. It seems like a decent time to start figuring out the process by which B shares can be sold.
Visa‘s proposal would allow the banks to exchange half their B shares for C shares, and the other half for newly created B-2 shares. The C shares could be sold according to a preset schedule, while the B-2 shares would resemble the original B shares, except that they would have double the responsibility for loss coverage. The proposal will be put up for a vote by all shareholders at some point in the future.
In a call explaining the proposal, Visa offered reasons that all investors should like the deal. Class A and C investors would continue to have the financial protection offered by the status quo, and they would also have a better sense of how Class B shares would be sold over time. The proposal would “[mitigate] the potential overhang risk in the current structure,” Visa CEO Ryan McInerney said on the call. “Class B stockholders would have an option for near-term liquidity and the potential for better regulatory capital treatment.”
It seems reasonable, but the market is worried about it anyway. Visa stock fell 2.6% on Thursday, the first trading day after the exchange offer was announced, its largest drop since May. Investors are apparently concerned that the offer will mean more stock coming to market. Jefferies analyst Trevor Williams estimates an additional $350 million or so of daily volume would be added to the current $1 billion, an amount he considers significant.
“We expect investors to have some near-term skittishness at the prospect of coordinated selling pressure over the course of the lockups should the proposal be approved,” he writes.
But Visa shareholders should ultimately find the arrangement to their liking. It offers a short-term overhang in place of a longer-term one, while Visa’s fundamentals remain unchanged. When Barron’srecommended buying shares nearly 11 months ago, we noted that the company had been punished despite the fact that it was still generating free cash flow, carried no net debt, and was compounding sales and earnings at a double-digit rate. It’s no longer being punished—the stock has gained about 36% since our pick—but the fundamentals remain the same.
Ultimately, the decline is just another opportunity for investors to buy shares on the dip, if they’re so inclined.
Write to Ben Levisohn at Ben.Levisohn@barrons.com