Visa shares soar 28 percent in debut

Visa stock is in demand because the company is insulated from credit woes.

SAN FRANCISCO (AP) — Catapulted by the biggest IPO in U.S. history, Visa Inc. shares soared 28 percent in their stock market debut Wednesday as investors bet an accelerating shift to electronic payments will enrich the world’s largest processor of credit and debit cards.

After being priced above expectations at $44 per share in an initial public offering that raised nearly $18 billion, Visa shares climbed to $56.50 in trading on the New York Stock Exchange. The run-up gives the San Francisco-based company a market value of about $50 billion.

The fervor reflects investors’ view that Visa is in a lucrative position as more people rely on its electronic network to make payments instead of using cash and checks. Visa is expected to milk the phenomenon to become an even bigger cash cow than it already is.

Visa generated $5.2 billion in annual revenue last year as it handled more than 44 billion transactions totaling more than $3.2 trillion. The volume puts Visa far ahead of its main rival MasterCard Inc., whose own shares have more than quintupled from their May 2006 IPO price of $39.

Making Visa even more alluring to investors, the company is well-insulated from the credit problems that have scarred many of the lenders that issue the cards bearing its brand.

Unlike those lenders, Visa doesn’t carry any consumer debt on its books. It depends on transaction fees, which have been steadily rising for years, including the past two U.S. recessions in 1991 and 2001.

Since the last recession, Visa has enticed consumers to use its credit and debit cards more frequently to pay for staples such as groceries, gas and even utility bills. Visa estimates about 42 percent of its transactions fall into this “nondiscretionary” category, up from 27 percent in 2000.

“Visa enjoys one of the widest economic moats that a company can desire,” Morningstar analyst Michael Kon wrote in a Wednesday research note.

Reflecting management’s confidence, Visa anticipates earnings growth of at least 20 percent for at least the next two years. The company got off to a fast start in its fiscal first quarter ending in December with a $424 million profit, up 70 percent from the previous year.

Visa overcame turbulent market conditions to shatter the previous U.S. record IPO of $10.6 billion raised by AT T Wireless eight years ago.

“To sell 400 million shares at a time like this is Herculean,” said David Menlow, president of IPOfinancial.com

Investment bankers could still exercise an option to buy an additional 40.6 million Visa shares during the next 30 days. If that happens, Visa’s IPO will end up raising $19.7 billion before expenses.

Visa has earmarked more than $10 billion of the IPO proceeds to buy back shares from the banks that helped build up its network over the past 50 years. The biggest chunk, about $1.25 billion, will be paid to its largest customer and shareholder, JPMorgan Chase Co.

The windfall comes a propitious time, given the banking industry’s wobbly condition as billions of losses pile up from the housing market’s worst downturn since the 1930s.

Another $3 billion from the IPO is being deposited into an escrow account to cover potential liabilities in lawsuits alleging Visa conspired to stifle competition and fix prices.