What Does Visa Stand to Gain by Acquiring Earthport?

by Trefis Team
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Visa (NYSE:V) made a second offer for Earthport on 8th February of 37 pence per Earthport share, valuing the deal at $320 million. This deal has been a power tussle between the top two payment networks of the world, namely, Visa and Mastercard. The first offer was made by Visa in December 2018 of 30 pence/share and was later eclipsed by Mastercard in January 2019 with 33 pence/share. Over the course of the previous four months Earthport’s shareholders stand to gain 23% over the first bid.

Below we discuss Earthport’s value proposition, according to Trefis analysis, and the benefit Visa gets from this deal. We have a price estimate for Visa of $148 per share, which is slightly below the current market price. You can view our interactive dashboard on What To Expect From Visa in 2019 to modify any key forecasts and gauge the impact changes would have on the company’s valuation, and see more of our Financial Services company data here.

What does Earthport do?

Earthport provides low-cost cross-border payment processing services to banks through its payment routes in 86 countries. It targets the low monetary value cross border payment market as high transaction fees of traditional payment providers such as SWIFT act as a deterrent. In addition to Expedited Payments (Global ACH), the company launched a real-time payment solution by partnering with Ripple Labs in 2014. After its initial release in 2012, Ripple started partnering with financial institutions and payment providers in 2013, and Earthport as one of Ripple’s early partners,  shares a similar goal of low-cost cross border value transfer.

Looking at recent years’ financials, Earthport has not been doing well with gross profit margin declining from 77% in 2015 to 64% in 2018. The number of transactions and payment volume flattened in 2018, resulting in revenue growth of only 5%. The company had been reeling under high administrative expenses and material delays in project implementation. Visa’s offer of 37 pence per share seems to be a good deal for Earthport’s shareholders as the stock was trading at 7.45 pence on 24th December 2018.

What does Visa Stand to Gain?

Through its global transaction processing platform (VisaNet), Visa provides its clients authorizing, clearing, settling, and other support services. It operates four global processing centers with a capacity to process 65,000 transaction messages per second (2 trillion per year). Visa processed 124 billion transactions and supported $8.2 trillion of payments volume in 2018. Visa’s cross-border transaction revenues command a share of 35% in the total revenues of $20 billion and C2B cross-border transactions are expected to grow at 10% CAGR through 2021 (per McKinsey), hence this segment is integral to Visa’s future growth.

Earthport processed 10 million transactions and supported around $14 billion of payment volume in 2018. With its 86 payment routes, global payment capability in 200 countries, low-cost payment processing capabilities, and a fully compliant DLT gateway utilizing Ripple protocol, this brings various intangible benefits to Visa.

Assuming a metric (market capitalization/payment volume), it is 0.041 for Visa (Visa’s market capitalization is assumed as $339.5 billion) and 0.054 for Mastercard (Mastercard’s market capitalization is assumed as $237 billion). By multiplying Visa’s metric with $14 billion of payment volume values Earthport at around $600 million. Considering this approximation, Visa stands to gain from this deal in the longer term by making an all-cash offer of $320 million which is slated to be finalized by 30th April.

Stay tuned for our detailed valuation dashboard on the impact of Earthport acquisition on Visa’s share price in the coming days.

 

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