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Visa, MasterCard Rise on Merchant Settlement

Shares of Visa Inc. (V) and MasterCard Inc. (MA) rallied Monday morning as investors responded to the payment-networks' proposed settlement of numerous long-standing lawsuits brought by scores of merchants over credit-card fees. The antitrust suits argued Visa, MasterCard and many large banks that issue their cards conspired over fees known as interchange that retailers pay each time a consumer swipes a credit card. The more than 50 consolidated lawsuits date back to 2005, prior to Visa's and MasterCard's initial public offerings, and have been an overhang on the companies' stocks. The pending deal, which plaintiffs' attorneys valued at $7.25 billion, is not final, as it still requires court approval and includes a provision that could derail the settlement if enough merchants opt out. It already faces opposition from at least one large trade group that represents 3,700 convenience stores. Analysts largely view the settlement as positive for payment networks, which have been plagued by numerous assaults on their fee structures in the U.S. and abroad. Visa and MasterCard "come away with an overhang removed and in a very strong position to return capital on a going-forward basis to an even greater extent than prior to this settlement," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, wrote Friday in a research note. Visa's shares rose 3.2% to $128, and MasterCard's shares were up 2.8% at $441.77 Monday morning. Under the deal, Visa, MasterCard and big banks that are also defendants in the suits, including J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC), agreed to pay more than $6 billion to settle the antitrust claims by a proposed class of merchants that could encompass millions of retailers that accept the payments networks' cards. Separately, the defendants also reached a settlement of similar lawsuits brought by about 20 individual retailers, including Kroger Co. (KR), Publix Super Markets Inc. (PUSH) and Safeway Inc. (SWY). Combined, the monetary portion of the two deals is about $6.6 billion, according to Visa, which is responsible for about 67%, or $4.4 billion, of that amount. MasterCard is on the hook directly for 12%, or $790 million, while the banks that issue its cards will pick up the remaining 21%. Visa and MasterCard have substantially accrued for those amounts, which some analysts had previously estimated could total as much as $12 billion. Before Visa went public in 2008, it set up a litigation escrow that is funded by its Class B shareholders, which are U.S. banks that issue its cards. The company has deposited $4.28 billion into that account, and it also has 104 million Class B shares available to fund additional amounts. Visa said it will take a $4.1 billion litigation charge in its fiscal third quarter to formally reserve for its portion, which could result in a tax benefit of as much as $1.35 billion, according to Sakhrani, who said the company could use that amount to buy back 10 million shares. MasterCard, which took a $770 million pre-tax charge in the fourth quarter, will take an additional $20 million for the second quarter to fund its remaining share. In addition to the payments, Visa and MasterCard also agreed to reduce the fees merchants pay on credit-card transactions by 10 basis points for eight months, a move plaintiffs' attorneys valued at $1.2 billion. The size of the reduction is an "upside surprise for the card networks," Jason Kupferberg, an analyst with Jefferies Group, wrote Friday in a research note. Visa and MasterCard set the fees, but they are collected as revenue by the banks that issue the cards. Large cuts to the so-called swipe fees could in turn prompt banks to pressure Visa and MasterCard to lower separate fees the banks pay to connect to the companies' processing networks. The current deal "should assuage any concerns that issuers will exert additional pressure" on Visa and MasterCard," Kupferberg wrote. Write to Andrew R. Johnson at [email protected]

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