Visa 2013 Annual Report Download - page 87

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VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2013
Note 2—Visa Europe
As part of Visa’s October 2007 reorganization, Visa Europe exchanged its ownership interest in
Visa International and Inovant for Visa common stock,a put-call option agreement and a Framework
Agreement, as described below.
Visa Europe put option agreement. The Company granted Visa Europe a perpetual put option,
which if exercised, will require Visa to purchase all of the outstanding shares of capital stock of Visa
Europe from its members. The Company is required to purchase the shares of Visa Europe no later
than 285 days after exercise of the put option. The put option agreement provides a formula for
determining the purchase price of the Visa Europe shares, which, subject to certain adjustments,
applies Visa Inc.‘s forward price-to-earnings multiple, or the P/E ratio (as defined in the option
agreement), at the time the option is exercised to Visa Europe’s adjusted sustainable income for the
forward 12-month period (as defined in the option agreement), or the adjusted sustainable income. The
calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement
includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise,
the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of
negotiation between the Company and Visa Europe. The put option agreement provides an arbitration
mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
The fair value of the put option represents the value of Visa Europe’s option, which, under certain
conditions, could obligate the Company to purchase its member equity interest for an amount above
fair value. The fair value of the put option does not represent the actual purchase price that the
Company may be required to pay if the option is exercised, which could be several billion dollars or
more. While the put option is in fact non-transferable, its fair value represents the Company’s estimate
of the amount the Company would be required to pay a third-party market participant to transfer the
potential obligation in an orderly transaction.
The fair value of the put option is computed by comparing the estimated strike price, under the
terms of the put option agreement, to the estimated fair value of Visa Europe. The fair value of Visa
Europe is defined as the estimated amount a third-party market participant might pay in an arm’s-
length transaction under normal business conditions. A probability of exercise assumption is applied to
reflect the possibility that Visa Europe will never exercise its option.
The estimated fair value of the put option represents a Level 3 accounting estimate due to a lack
of trading in active markets and a lack of observable inputs in measuring fair value. See Note 4—Fair
Value Measurements and Investments. The valuation of the put option therefore requires substantial
judgment. The most subjective of estimates applied in valuing the put option are the assumed
probability that Visa Europe will elect to exercise its option and the estimated differential between the
P/E ratio and the P/E ratio applicable to Visa Europe on a standalone basis at the time of exercise,
which the Company refers to as the “P/E differential.”
Exercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe
shareholders pursuant to authority granted to Visa Europe, under its Articles of Association). The
Company estimates the assumed probability of exercise based on reasonably available information
including, but not limited to: (i) Visa Europe’s stated intentions; (ii) indications that Visa Europe is
preparing to exercise as reflected in its reported financial results; (iii) evaluation of market conditions,
including the regulatory environment, that could impact the potential future profitability of Visa Europe;
and (iv) qualitative factors applicable to Visa Europe’s largest members, which could indicate a change
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