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Stock Strategist

Brazil's Visanet IPO Charges Ahead

The IPO of Visanet, the Brazilian affiliate of credit card processor Visa, could raise close to $5 billion. Get our take on the firm's prospects.

While we've seen some strong activity in the domestic IPO market this week, it's time to turn our attention abroad, where a massive IPO is brewing. Visanet, the Brazilian affiliate of credit card processor  Visa (V), is seeking to raise 7.2 billion reais, or about $3.7 billion, with shares set to trade next week. However, given the buzz around this offering, demand could drive the total amount raised to a massive $4.9 billion. While the prospectus was only available in Portuguese, we weren't going to let that stop us from commenting on what will likely be the largest IPO of the year. Morningstar equity analyst Drew Woodbury shares his take on the firm:

"Visanet, formed in 1995 as a joint venture between Visa International and several major Brazilian banks, is currently the sole proprietor of the Visa brand and network in Brazil. In 2008, it processed transaction volumes over BRL 375 billion, making it the largest payment card company in Brazil. Visanet is responsible for many of the steps involved in Visa transactions, including signing merchants up to accept cards, renting out the terminals used to clear transaction and processing the transactions for Visa and its bank network. Controlling so many steps in card transactions allows Visanet to take a significant share of the value Visa's card transactions in Brazil.

The prospects for card-based payments in Brazil appear strong. Between 2000 and 2008, private consumption in Brazil rose at an 11.3% compound annual rate. At the same time, the use of payment cards as a percentage of total family spending rose from 8.7% to 21.4%. Brazil, along with many other countries in the world, is experiencing a secular payments trend from paper to plastic, which should continue to benefit the Brazilian credit and debit card industry. Visanet has further room to expand, as cards have penetrated the Brazilian market much less than they have in more developed countries. For example, 40% of private consumption in the United States is transacted with payment cards compared with just 19% in Brazil. This leaves a lot of room for Visanet to expand its operations as card usage in Brazil increases.

However, Visanet still faces a number of challenges and risks. For one, it currently is the only Visa brand company within Brazil, and its exclusive licensing agreement ends in June 2010. If Visa International decides to authorize other firms to clear transactions or sign merchants up to accept cards, Visanet's revenue growth may contract. More generally, Visanet operates within the regulatory framework of Brazil, which is often characterized by significant government intervention. New regulation--which could include specific limits on the interchange fees that Visa and Visanet could collect from merchants--might hamper the company's profitability.

Overall, we are fairly optimistic about the prospect of Visanet. We believe a secular shift away from cash payments toward cards will provide the company with significant tailwinds. The company offers investors a play on both the Brazilian consumer and the card payments market."