Visa Inc. says it plans to convert $1.6 billion of the shares that it holds on behalf of credit unions and banks to help fund a potential $4 billion settlement with merchants over a civil price-fixing suit.

The conversion of the company’s Class B shares will decrease the value of Visa holdings for credit unions and banks, which owned the cards giant until its 2008 initial public offering. Fifth Third Bancorp announced on Dec. 5 it took a $68 million write-down on its Visa shares for the fourth quarter.

Shares in Visa and MasterCard Inc. are the only common equity credit unions are universally allowed to own.

Wall Street is referring to the voluntary deposit of credit union and bank shares into the company’s litigation escrow fund as a “back-door” share buyback because Visa will draw on funds allocated to a $2 billion Class A share-buyback announced this year that will have the same effect on earnings per share as repurchasing Class A stock.

Observers expect Visa to use the funds in the escrow account to settle civil litigation with merchants who claim Visa and MasterCard conspired to suppress competition by banning merchants from steering customers to cheaper forms of payment (see story).

A settlement of the case, which involves interchange fees on credit cards, may total at least $4 billion, according to MasterCard’s estimate in November, with Visa responsible for two-thirds of the total.

Under the plans for the litigation account, established as part of the 2008 IPO, when the company makes a deposit, the value of its Class B shares¬–held exclusively by U.S. credit unions and banks–is correspondingly adjusted via a reduction in the Class B shareholders' as-converted share count, requiring a write-down of the value of the shares.

Visa deposited $1.2 billion into the litigation account in its 2011 fiscal year, which ended on Sept. 30, and paid out $280 million, increasing the size of the fund to almost $2.9 billion.

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