Americas Equity Issue
Flawless execution: Priced in the middle of the most hostile IPO market in more than 30 years, Visa’s historic US$19.7bn IPO proved that only the very best deals price well in poor conditions. For innovative marketing and flawless execution on the largest US IPO, and for introducing sovereign wealth funds to the market, Visa is IFR’s Americas Equity Issue of the Year.
The role of sovereign wealth in the US equity capital markets took a great leap forward last year when JP Morgan and Goldman Sachs priced Visa’s US$19.7bn IPO. Pricing a flotation in a difficult market is always impressive, but by marketing the largest ever US IPO exclusively to sovereign wealth, in anticipation of bringing the deal to traditional accounts at a later date, the joint bookrunners broke the mould of traditional marketing tactics.
JP Morgan’s leadership role was never in question, because of the bank’s 23% equity stake in Visa. After taking MasterCard public earlier in the year, Goldman Sachs also seemed a logical choice to co-lead the Visa IPO, but the decision was more complex.
“Visa and MasterCard are like Coke and Pepsi,” said Goldman Sachs managing director Stuart Bernstein, “and Goldman Sachs was considered to be MasterCard’s banker.” In the end, Goldman commanded equal billing with JP Morgan.
Regardless of market conditions, the mandate to sell 50.1% of Visa would prove to be an uphill battle. Visa’s global footprint results in nearly twice the number of transactions than its rival, so MasterCard’s US$12.5bn market value implied that Visa could be worth US$25bn.
“Even in a good market, that is a lot of supply,” said Bernstein, “but you can’t allow the investors to set the price.”
The solution was to market to sovereign wealth funds, especially to those looking to expand their banking partnership with Visa. “Foreign countries want to establish long-term partnerships with their portfolio companies,” added Bernstein. “Visa is a strategic investment because it provides the opportunity for a developing country to improve its processing technology and broaden its banking relationships.”
A series of meetings with heads of state across Europe, the Middle East and the Far East three weeks before the traditional roadshow resulted in better than expected demand.
“The ability to sit down with finance ministers and come away with US$5bn of orders is game-changing,” said Stephen Pierce, head of ECM for the Americas at Goldman Sachs.
The official roadshow commenced weeks later, with two teams marketing the deal over 13 days in US, European, Middle Eastern and Asian road shows. During this time, Visa management held one-on-one meetings with 181 investors and saw more than 750 additional investors in group functions.
“The pricing strategy was designed to build early indications of interest in order to walk investors up to higher valuations,” said Kevin Willsey, head of equity capital and derivative markets at JP Morgan. When the deal priced on March 18, it ended a one-month pricing drought in the US IPO market. “The sovereign wealth marketing effort created a sense of scarcity, but institutional demand drove the deal,” says Willsey.
The Visa marketing strategy also demonstrated how to create an overflow of demand for a large IPO without relying upon a heavy retail presence. A call for a 17% retail allocation was met with just 13% of supply. International allocations were also tricky and sovereign wealth accounted for roughly 5%–7% of the deal. “We couldn’t weight one country’s allocation over that of another,” said Willsey.
MasterCard stock trading hinted at a successful deal for Visa, as the smaller credit card firm shed as much as 10% of its value in anticipation of the Visa IPO. The switching of positions is easily explained: both companies went public to eliminate the risk of new lawsuits stemming from a 1998 antitrust claim from the US government, but MasterCard shareholders remain exposed to existing lawsuits.
By contrast, Visa has insulated shareholders by adopting a Retrospective Responsibility Plan that protects them from legacy litigation risk – a programme that some large MasterCard shareholders found appealing.
With an increased number of MasterCard defectors taking an interest in Visa, the underwriting team pushed for early pricing, even though the rest of the financial world was falling apart. The 406m-share offering was priced at US$44, US$2 above the proposed US$37–$42 target just as Bear Stearns was beginning to unravel.
The underwriters had hoped to achieve a premium valuation to MasterCard. And while the offering was said to be at a high single-digit to low-teens discount to the rival processing agency, Visa quickly gained ground the aftermarket, trading up 29%.
Robert Sherwood.
