Visa can credit rivals for rich IPO

NEW YORK (Fortune) -- If Visa's just-filed initial public offering documents are any indication, it looks like the company is the biggest beneficiary of its rival MasterCard's own decision to go public in the spring of 2006. San Francisco-based Visa is seeking to sell as much as 446 million shares between $37 and $42 per share, which would make the approximately $18.8 billion raised the second largest IPO in history, behind China's Industrial and Commercial Bank Ltd's $22 billion, and the largest ever for a U.S. company.

Infatuation with MasterCard's ability to pull off quarter after quarter of low-risk, double-digit growth has investors ready and willing to pony up for a chance to own industry leader Visa.

The marketing of Visa's IPO will attempt to capitalize on two interconnected developments.

The first is that the nature of its business - it takes fees from processing transactions and does not extend credit - sets it apart from competitors like American Express and Discover Financial Services (DFS), whose stocks have been battered under increasing charge-offs and payment delays.

Visa, according to its filing, appears to have no direct exposure to the ever-spiraling credit crisis. It is difficult to overstate the penalty investors are currently assigning financial stocks with consumer debt portfolios, but the price-to-earnings ratio does as good a job as any in illustrating this - If Visa sells stock at $42, it will have a PE of just over 27.

American Express (AXP, Fortune 500), on the other hand, is currently trading at just over 13 times next year's earnings estimates.

The second factor is the screaming success of MasterCard's May 2006 IPO. Since going public in May 2006 at $39, Purchase, N.Y-based MasterCard (MA) has seen its stock price appreciate almost 500 percent in less than two years, hitting a high of over $227. Ironically, MasterCard's underwriters initially had difficulty moving the stock at its targeted range of $40-$43. Given that in its IPO filing Visa claims to process nearly double the number of credit- and debit-card transactions of MasterCard - 44 billion to 23.4 billion - stock-buyers are licking their chops at the combination of market dominance and no embedded credit risks.

Visa is also touting its growth prospects, especially away from the slowing U.S. economy. For example, its IPO filing argues that the Asia/Pacific region is slated for a compounded annual growth rate of 20% annually through 2012, and 17% annual growth in the Mid-East and Africa.

A glance at the pro-forma balance sheet shows that Visa is traveling relatively light for a company that reported operating revenues of $5.19 billion last year. At first pass, the $12.23 billion in total liabilities catches the eye, but footnotes reveal that about $10 billion of this is for buying the stock of Visa's membership network, including Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500). The $2.23 billion in remaining liabilities is covered handily by the $4 billion in cash and equivalents listed.

This is not to say that there are no headaches on the horizon for Visa. The company is placing $3 billion in an account to cover the costs of a variety of anticipated or negotiated litigation settlement costs.

Also, Visa appears to be unusually dependant on less than handful of major banks for a good portion of its business. Last year, about 23% of its revenues, or $1.2 billion, came from their five largest customers. J.P. Morgan Chase (JPM, Fortune 500) alone accounted for 9%, or $454 million. The filing notes that "On short notice" these relationships can be terminated.