On Monday, world’s largest payment network provider Visa Inc (V) announced that it will strategically acquire its former subsidiary Visa Europe, an association owned and operated by European member banks and other payment service providers in a cash and stock deal worth EUR 21.2 billion (or $23.35 billion).

Strategic Purpose

The strategic purpose of the deal is to benefit from economies of scale, cost synergies and increase fees in the second largest electronic payments market. The deal will expand Visa Inc. in Europe to make it a single global company. The merger will add more than 3,000 financial institutions to Visa's partners list and 500 million European cards to their clientele, which is responsible for about 18 billion transactions worth more than 1.5 trillion euros. After the acquisition, Visa Inc. will take a lead over its rival Mastercard Inc.

Visa said in their press release, “As a result of the combination, European clients will have greater access to Visa Inc.’s scale and resources and global clients will have a more seamless experience. Additionally, European clients will benefit from direct access to Visa Inc.’s investments in innovative technology and differentiated products and services.”

The Details

The deal – worth 21.2 billion euros – will include an upfront consideration of 16.5 billion euros, followed by an additional payment of 4.7 billion based on the earn-outs. The upfront consideration includes a cash payment of 11.5 billion and stock consideration of 5 billion, converted from preferred stock Visa Europe to common stock of Visa Inc. Visa Inc. will raise $16 billion in debt to fund the transaction.

The deal provides windfall gains to European banks and other payment service providers who currently own stakes in Visa Europe and gives them an opportunity to shift to rival Mastercard if they render payment services at lower rates.

Investors Reaction

After the announcement, the shares of Visa Inc fell by about 3% (or $2.36) as the investors perceive that the company is paying higher-than-expected premium for the acquisition. The company’s shares have been in positive territory by 18% from the start of 2015. Both S&P and Moody’s have affirmed the company’s debt rating following the announcement with stable outlook.

The announcement came after Visa Inc. reported their third quarter’s top line and bottom line to be in line with the analyst’s expectations, despite being hurt by dollar appreciation.

The Bottom Line

The combination of Visa Inc and Visa Europe is expected to create high cost synergies and gives opportunity for Visa Inc to expand back into Europe, which is the second largest card market. Visa Inc. believes that the deal will be accretive and company will start accruing the benefits of the deal after March 2016. Visa Inc. CEO, Charles Scharf, said, “The deal will help accelerate the transition from cash to electronic payments throughout Europe. The companies estimate that 37% of European personal-consumption spending still occurs via cash and checks and there is still a tremendous opportunity to electronify payments.”

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