The card industry soon will see a fundamental change in its makeup as MasterCard International announced plans to conduct an initial public offering of stock that could shift control of the association from its member banks to investors. MasterCard Inc., parent of MasterCard International, filed an S-1 Registration Statement with the Securities and Exchange Commission in September that addressed many of its plans.
The filing also opened the door a little wider on MasterCard's inner workings, though the Purchase, N.Y.-based association has been filing reports with the SEC for the last several years.
MasterCard seeks to raise $2.45 billion in the IPO scheduled for the first quarter of 2006, It would issue voting Class A common stock to the public investors, giving them 49% of the company and control of 83% of the voting rights. A charitable foundation controlling 10% of the stock would be created, and MasterCard's current shareholders-1,400 financial institutions worldwide-would retain 41% equity interest through ownership of nonvoting Class B common stock. A new board of directors comprised of a majority of independent directors would be appointed.
MasterCard did not disclose the number of shares to be issued or the total amount of money it expected to raise. Goldman, Sachs & Co. was named as the underwriter. The stock will trade under the symbol MA.
The registration indicates that current shareholders may be the primary beneficiaries of the IPO. In a complicated formula, MasterCard reports it will reclassify all of its 100,000,348 shares outstanding, providing to existing shareholders 1.35 shares of Class B stock for each share held, and a single share of Class M common stock. MasterCard also will issue 13,500,047 shares of Class A stock as a donation to The MasterCard Foundation, a private charitable organization.
In the IPO MasterCard will offer 61,535,098 Class A common shares. After the IPO, MasterCard reports it will have 75,035,145 Class A shares, and 59,965,325 Class B shares for a total of 135,000,470 shares outstanding. MasterCard plans to use all but $650 million raised from the offering to redeem Class B shares equal to the combined 75,035,145 Class A shares issued to the public and the foundation.
In the filing, MasterCard says it is going public and raising capital to better address growing legal challenges, to step up its merchant programs, to allow it to compete in a global industry with a raft of new competitors and to buy back shares currently held by its members.
Initial reaction ranged from positive to wary. "It's long overdue," said Alex "Pete" Hart, who left as MasterCard's CEO in 1994. "It will eliminate a lot of the legal issues they have to wrestle with." Hart, who now runs his own consulting company in Rancho Santa Fe, Calif., says the IPO would enable MasterCard "to compete on the same footing as American Express and Discover, neither of whom have had to put up with those things."
MasterCard could use the capital from the stock sale to buy a processor or to get back into the acquisition business, says Les Riedl, president of Speer & Associates, an Atlanta-based consultancy. MasterCard may have been holding back on entering into new ventures or markets because of concerns about competing with its members.
The IPO would free MasterCard from such fears, Riedl says. "It will enable MasterCard to create a fully competitive processor as one subsidiary or division that is separate from the brand-related functions MasterCard provides," he says, noting that both MasterCard and its competitor, Visa, provide processing services globally.
"[MasterCard's] goal is to figure out how to take a business that has been positioned as a utility under the association model and now really unlock that capability and allow it to grow capital in an open-market environment," predicts Riedl.
If MasterCard succeeds, Visa may be forced to emerge from the membership structure as well, says Riedl.
Indeed, Visa left the door open to that possibility. In a statement following MasterCard's announcement, Visa said that its "management team and board of directors continually assess how best to structure our organization so that we can optimize value to all shareholders."
MasterCard has some major challenges. It faces several antitrust suits filed by merchants this year over interchange fees and surcharge policies. In 2003, MasterCard settled its portion of a merchant class-action suit by paying the retailers $1.05 billion, temporarily dropping its debit interchange rates and eliminating the honor-all-cards rule.
In its SEC filing, MasterCard said that it plans to retain $650 million from the IPO that could be used to "defend our interests in the legal and regulatory arena."
Shortly after the IPO announcement, the United Kingdom's Office of Fair Trading ruled that MasterCard's interchange system was anticompetitive. The regulator said in a statement that MasterCard's policy, in effect from March 1, 2000, through Nov. 18, 2004, resulted in overcharging. The arrangement infringed on parts of the European Commission Treaty and the UK's Competition Act, the OFT said. "This unduly high interchange fee was like a tax on UK consumers," according to the OFT's chairman, John Vickers.
MasterCard said it would appeal the ruling, and industry observers generally said the OFT decision would not have a direct impact on U.S. interchange policy. In November 2004, MasterCard introduced a new interchange policy but the OFT has said it will launch an inquiry into that program as well.
Stock analysts were cautious before putting any value on the IPO or MasterCard itself. MasterCard needs to be forthcoming concerning where it wants to grow its business and how it will interact with and generate revenue from stakeholders, the card issuers and merchant acquirers, says Franco Turrinelli, an analyst that covers card processors for William Blair & Co. in Chicago.
Craig Maurer, an analyst with Fulcrum Global Partners, put a conservative value of $7 billion on MasterCard, using a multiple of 2.5% of its projected 2005 revenues. However, that estimate does not consider MasterCard's future earnings potential, he notes.
Maurer also downplays the value of the MasterCard brand name. "A lot of people care if they carry an American Express Co. card," says Maurer. "But MasterCard and Visa are interchangeable in the U.S. American Express is worth more than either."
MasterCard would not comment on its plans, citing a "quiet period" as it prepares for the IPO.
(c) 2005 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
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