Visa (NYSE:V) announced a $600M deposit into its litigation escrow account after the close of trading on Tuesday, a move that equates to repurchasing its stock. Visa shares are rising 0.7% in Wednesday midafternoon trading.
As Baird analyst David Koning explains it, “Visa’s (V) issuer banks cover Visa for this litigation and by putting its own money into the escrow account, the banks essentially pay Visa back with shares.”
Under the terms of the company’s U.S. retrospective responsibility plan, when Visa (V) funds the U.S. litigation escrow litigation account, the value of its class B shares, which are held exclusively by U.S. financial institutions and their affiliates, are subject to dilution through a downward adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock.
This has the same effect on EPS as repurchasing the company’s class A common stock, by reducing the class B conversion rate and consequently, the as-converted class A common stock share count by the deposit amount.
Baird estimates that the deposit increased Visa’s (V) litigation escrow account to $1.4B-$1.5B, up from $882M at the end of last quarter.
This latest transaction represents a buyback of ~3M shares, which should increase Visa’s (V) annual EPS by less than a cent, Koning estimates. For some perspective, the company has been repurchasing ~8-19M shares per quarter in recent quarters.
“We are not sure why this is occurring now,” Baird’s Koning wrote in a note to clients. “If there is a settlement near term, it seems easier to have it come out of one escrow account than for each of the banks to send in a separate check. In essence, the banks gave Visa stock back, and Visa gave the litigation account one big easy-to-use lump sum.”