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MasterCard makes plans to go public

As it faces lawsuits regarding its competitive practices, the credit card brand will have an IPO to address related costs.

Associated Press
Published September 1, 2005

NEW YORK - MasterCard Inc., one of the world's largest credit card brands, on Wednesday unveiled plans for an initial public offering to help reshape its business during a time of unprecedented competitive and legal challenges mounted by rivals.

The credit card association based in Purchase, N.Y., is controlled by 1,400 financial institutions that issue MasterCard-branded products. The IPO is expected in next year's first quarter and will transfer a 49 percent equity stake and voting control into the hands of investors.

The move comes as both MasterCard and larger rival Visa USA Inc. contend with a court decision that allows member banks - for the first time - to issue competing card brands of companies such as American Express Corp. and Discover Financial Services, a unit of Morgan Stanley Inc. This opened the door for those companies to file lawsuits against the two credit card giants seeking unspecified damages stemming from anticompetitive practices.

An unfavorable verdict could cost MasterCard and Visa hundreds of millions of dollars as suits filed under antitrust laws can seek triple damages. MasterCard chairman Baldomero Falcones and president and chief executive Robert W. Selander said in a letter to member banks the IPO was in part formulated to address these legal hurdles.

"We will retain $650-million of the IPO proceeds to fund a capital increase, the economic impact of which will be borne by our U.S. shareholders," the letter said. "Along with the proposed structural changes, we believe these resources will place us in position to defend our interests in the legal and regulatory arena."

MasterCard said in a filing with the Securities and Exchange Commission that a proxy statement to be filed in a few weeks will contain more details about the IPO, which shareholders will be asked to vote on by the end of the year. Any public offering will also require regulatory approval.

The new structure will give member banks a 41 percent equity stake through nonvoting Class B stock, as well as Class M stock that allows them to elect directors and approval rights for significant decisions. MasterCard said it will appoint a new board - the majority of which will be independent.

Investors who buy shares in a public offering will be given 83 percent voting rights in the company. Additional shares of Class A common stock, representing an estimated 10 percent of the company's equity and the remainder of its voting rights, will be issued to a new MasterCard charitable foundation.

A spokeswoman for MasterCard declined to comment because of a standard quiet period imposed by regulators on companies planning IPOs.

MasterCard and Visa face lawsuits filed by retailers that claim fees they must pay on each transaction should be considered price fixing and are designed to stifle competition. Both credit card associations - valued for their processing networks as much as the brand names - make most of their profit from the fees.

"When you look at how the political landscape is changing over fees, regulatory issues and competition concerns, the banks that are shareholders just want to disassociate themselves from some of the legal harangues," said Ed Groshans, a specialty finance analyst with Fox-Pitt, Kelton.

[Last modified September 1, 2005, 00:57:17]

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