Visa 2015 Annual Report Download - page 65

calculation of Visa Europe’s adjusted sustainable income under the terms of the unamended put option
agreement includes potentially material adjustments for cost synergies and other negotiated items.
Upon exercise, under the unamended terms,the key inputs to this formula, including Visa Europe’s
adjusted sustainable income, would be the result of negotiation between us and Visa Europe. The
unamended 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 unamended put option represents the value of Visa Europe’s option under its
unamended terms, which, under certain conditions, could obligate us to purchase its member equity
interest for an amount above fair value. At September 30, 2015, we determined the fair value of the
unamended put option liability to be approximately $255 million. While this amount represents the fair
value of the unamended put option at September 30, 2015, it does not represent the actual purchase
price that we may be required to pay if the option is exercised under its unamended terms. The
purchase price we could be obligated to pay 285 days after exercise will represent a substantial
financial obligation. Given current economic conditions, the purchase price under the unamended
terms of the put option would likely be in excess of $15 billion. We may need to obtain third-party
financing, either by borrowing funds or undertaking a subsequent equity offering in order to fund this
payment. The amount of that potential obligation could vary dramatically based on, among other
things, Visa Europe’s adjusted sustainable income and our P/E ratio, in each case, as negotiated at the
time the put option is exercised.
Given the perpetual nature of the unamended put option and the various economic conditions
which could be present at the time of exercise, our ultimate obligation in the event of exercise cannot
be reliably estimated. The following table calculates our total obligation assuming, for illustrative
purposes only, a range of P/E ratios for Visa Inc. and assuming that Visa Europe demonstrates $500
million of adjusted sustainable income at the date of exercise. The $500 million of assumed adjusted
sustainable income provided below is for illustrative purposes only. This does not represent an
estimate of the amount of adjusted sustainable income Visa Europe would have been able to
demonstrate at September 30, 2015, or will be able to demonstrate at any point in time in the future.
Should Visa Europe elect to exercise its put option in its unamended form, we believe it is likely that it
will implement changes in its business operations to move to a for-profit model in order to maximize its
adjusted sustainable income and, as a result, to increase the purchase price. The table also provides
the amount of increase or decrease in the payout, assuming the same range of estimated P/E ratios,
for each $100 million of adjusted sustainable income above or below the assumed $500 million
demonstrated at the time of exercise. At September 30, 2015, our estimated long-term P/E ratio was
21.3x and the long-term P/E differential, the difference between this ratio and the estimated ratio
applicable to Visa Europe, was 1.5x. At September 30, 2015, the spot P/E ratio was 23.2x and the spot
P/E differential, the difference between this ratio and the estimated spot ratio applicable to Visa
Europe, was 1.8x. These ratios are for reference purposes only and are not necessarily indicative of
the ratio or differential that could be applicable if the put option were exercised at any point in the future
in its unamended form.
Visa Inc’s Forward
Price-to-Earnings Ratio
Payout Assuming
Adjusted Sustainable
Income of $500 million(1)
Increase/
Decrease in Payout
for Each $100 million of
Adjusted Sustainable
Income Above/
Below $500 million
(in millions) (in millions)
25 $12,500 $2,500
20 $10,000 $2,000
15 $7,500 $1,500
(1) Given current economic conditions, the purchase price under the unamended terms of the put
option would likely be in excess of $15 billion.
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