Welcome to the
reset's Fiscal Q4 2015 Earnings Conference Call. All participants are in a listen only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host, Mr.
Jack Karski, Head of Global Investor Relations. Mr. Karski, you may begin.
Thanks, Dexter. Good early morning, everyone, and welcome to Visa Inc. Q4 and full fiscal year 2015 earnings conference call and Visa Europe acquisition discussion. With us today from London are Charlie Scharf, Visa's Chief Executive Officer and Nicola Huss, Visa Europe's Chief Executive Officer. Here in California, we have Hassane Prabhu, Visa Inc.
Chief Financial Officer. This call is currently being webcast over the Internet and is accessible on the Investor Relations section of our website at investor.visa.com. A replay of the webcast will be archived on our site the next 30 days. PowerPoint decks containing the financial and statistical highlights of today's earnings commentary and an overview of the Visa Bureau transaction were posted to our website prior to this call. Let me also remind you that these presentations may include forward looking statements.
These statements aren't guarantees of future performance and our actual results could materially differ as a result of a variety of factors. Additional information concerning those factors is available in our most recent reports on Form 10 ks and 10 Q, which you can find on the SEC's website and the Investor Relations section of our website. For historical non GAAP or pro form a related financial information disclosed in this call, related GAAP measures and other information required by Reg G of the SEC are available in the financial and statistical summary accompanying today's press release. And with that, I'll now turn the call over to Charlie.
Thanks a lot, Jack, and greetings from London. It's great to have Nicola here as well, and you'll be hearing from him in just a little bit. We certainly appreciate the early hours, especially for those on the West Coast this morning. Given our announcement regarding Europe, we thought it was important to do the call as early as possible given the desire to communicate with our clients, employees and partners here in Europe. We're quite excited about our announcements and have a full agenda, so we'll try and move through our prepared and material quickly, leaving plenty of time for Q and A at the end.
We have 6 topics to talk about this morning. First, we reported a solid Q4 and strong year end to fiscal 2015. 2nd, we'll review our outlook for the fiscal 2016 year on a standalone basis. 3rd, I have some brief comments on our previously announced dividend increase. And 4th, we announced the acquisition of Visa Europe.
As you know, we have been clear that this was a transaction that we thought made tremendous sense for both our company, but also for Visa Europe and its members. So we're thrilled to be able to move forward as one company. And with the Visa Europe acquisition, we announced 2 other items regarding our capital structure. First, our board has approved an increase to our buyback authorization to bring the total available to $7,800,000,000 And second, we announced that we will implement a new capital structure for the company. We intend to raise $15,000,000,000 to $16,000,000,000 of debt in conjunction with the vz Europe announcement, but you'll see that we view this as a trigger to implement a more efficient long term capital structure for the company.
We'll first talk about our earnings results and outlook for 2016, and then we'll discuss the VZ Europe acquisition and our capital actions, leaving time for questions. And with that, I'll turn it back to Vasant.
Thank you, Charlie. As Charlie indicated, we have a lot to talk about on this call. I will only comment briefly on our Q4 and 2015 results and spend most of my time giving you as comprehensive a picture as we can of our outlook for fiscal 2016. We're pleased to report another strong quarter and full fiscal year results with solid revenue and earnings growth. Our high growth in a tepid global environment demonstrates yet again the fundamental resilience of our business model.
Results were generally in line with our expectations going into the quarter with a few callouts. First, our core metrics remained robust around the globe. The underlying secular conversion from cash and checks to electronic forms of payment continues at a fast clip as demonstrated by high domestic payment volume growth rates. This is obscured by the significant drag caused by the strengthening of the dollar against most major currencies over the course of the year. In the Q4, this impact worsened as the dollar strengthened further against key currencies.
This hurts us not only in currency translation terms, but also in slowing cross border volume growth. 2nd, as expected, client incentive levels in the quarter came in at 18.4%, well above the full year run rate of 17.1%. This sets us up well for fiscal 2016 payments volume growth. Several key renewals as well as a couple of significant wins will drive the incentive rate higher in 2016. I'll talk more about this when I discuss our outlook for 2016.
3rd, expense growth was somewhat higher than we had anticipated due to a legal settlement in Australia and Visa Europe transaction costs. This cost is about a $0.01 of EPS in the quarter. Finally, we did not repurchase stock in the quarter due to the Visa Europe conversations that were underway. For the full year, we repurchased 44,100,000 shares at a price of just under $66 per share for a total of $2,900,000,000 We currently have authorization to repurchase up to $2,800,000,000 of stock under our prior plan and an incremental $5,000,000,000 recently authorized by our Board. Moving on to the quarter's business drivers and our financial results.
Global Payments volume growth in constant dollars for the September quarter continued to be strong at 12%. U. S. Credit grew 10%, moderating 2% compared to the June quarter as the positive effects of the Chase conversion wane. U.
S. Debit grew at 9%, up 3 points from June. Though gasoline prices continue to have a significant negative effect of approximately 2 percentage points, growth in interleak volume tied to certain routing wins offset a significant portion of the gas impact. International payments volume constant dollar growth of 15% was up over the prior quarter with increases posted in all regions and more specifically powered by the Middle East, Sub Saharan Africa and Mexico. More recently through October 28, U.
S. Payments volume growth was 9% with U. S. Credit growing 9% and debit 10%, a slight downtick in credit and uptick in debit versus the 4th quarter. Global cross border volume growth declined to 5% after 3 consecutive quarters of 8% dollar growth.
As has been the case for several quarters now, the strengthening of the U. S. Dollar is negatively impacting key corridors of cross border commerce, specifically outbound commerce from Russia, Canada and Brazil have deteriorated further in the past few months. While growth rates were still high in Q4, outbound commerce from China has seen a moderation in trend. Inbound commerce into the U.
S. Continued to drift lower in August September. The bright spots are outbound commerce from the U. S. And the Middle East, Commerce into Europe has been growing from most regions, but as you know, we do not benefit as much from it currently.
Despite the slowdown in cross border payment volume growth and the significant negative drag from currency translation, international revenues grew 16%, helped by the previously announced pricing actions and continued high currency volatility. Overall, growth was relatively was impacted relatively equally by pricing and currency volatility. Through October 28, cross border volume growth on a constant dollar basis has slowed further to 3% in line with the August September trend. Transactions processed over Visa Net totaled $18,000,000,000 in the 4th quarter, an 8% increase over the prior year period and unchanged from the June quarter. The U.
S. Delivered 11% growth, while international growth was flat. International process transaction growth is 13% when you normalize for the transfer of domestic processing in Russia that started at the end of April. Through October 28, process transaction growth was 8% with a U. S.
Rate of 11% and an international growth rate that remained flat. The international rate of course being impacted by Russia. Overall, we had a strong finish to another solid year of top and bottom line growth. Net operating revenue in the quarter was $3,600,000,000 a 13% increase year over year in constant dollars or 11% in nominal dollars. For the full fiscal year, net operating revenue was up 12% on a constant currency basis, over 9% in nominal dollars.
Diluted earnings per share in the quarter was $0.62 a 16% increase in constant dollars or 14% on a nominal basis over the prior year's adjusted results. For the fiscal full year, diluted adjusted earnings per share grew 18% on a constant currency basis, almost 16% in nominal dollars. With that, I'll move on to our outlook for fiscal 2016. Starting with payment volumes. Payment volumes globally have grown around 11% in constant dollars for the past 2 years.
As we look ahead to 2016, we're anticipating an uptick in growth driven by the U. S. Most of this step up in the U. S. Growth rate is expected in the Q2 of fiscal year 2016 and beyond.
The Q1 trend should be generally in line with what we experienced in the Q4 of fiscal 2015. As we enter the Q2 of fiscal 2016, we begin to fully lap the big gas price declines from last year. In the second half, USAA conversions are expected to start. And then late in the fiscal year, Costco conversion should commence. Offsetting these to some extent will be the end of JP Morgan conversion gains.
Outside the U. S, easier comparisons our Latin America and CEMEA regions as they lap the sharp declines last year in Brazil and Russia should help reported growth rates. If all this plays out as we expect, Global Payments volume growth will accelerate in 2016, ramping as the year progresses and setting it up nicely for 2017. Moving on to the cross border business. Cross border volumes, as you all know, are dependent on global economic conditions and the relative strength of key currencies, most particularly the U.
S. Dollar. In fiscal year 2015, we experienced sharp declines in outbound cross border volume growth due to both these factors in key markets like Canada, Australia, Japan, Brazil and Russia starting late in the Q1 and worsening as the year progressed. Our large U. S.
Inbound business also declined as the dollar gained strength. And in the Q4, Chinese outbound volumes started to soften. Through the first half of fiscal twenty sixteen, we are not anticipating any meaningful improvement in cross border growth rates from current levels. As we enter the second half, comparisons are easier and if the dollar stays stable or weakens, we could see an uptick in growth. Net net, we expect the cross border business will remain sluggish in the first half.
Dollar strength and macroeconomic conditions will determine the second half. On balance, we are planning for improved cross border growth rates in the second half of fiscal twenty sixteen. While cross border growth slowed in FY 2015, currency volatility hit new highs as the year progressed serving as a significant offset. Year over year growth rates were accentuated by the unusually low levels of volatility experienced in the second half of twenty fourteen. Speculation about Fed rate increases in the U.
S, the sharp decline in commodity prices, uncertainty about Chinese growth, Greece, etcetera, all contributed to keep currency markets guessing. Given the high level of experience in 2015, it seems very unlikely that volatility will be a tailwind again in 2016. Volatility has moderated in recent weeks and although uncertainties persist, one might project a reversion to the mean for the year. Given all this, we're assuming that currency volatility will be a headwind throughout fiscal 2016 and significantly so as the year progresses when comparisons get a lot tougher. Process transaction growth rates dipped from 10% in the first half to 8% in the second half as we transferred domestic processing to NSPK in Russia.
About half of the domestic transactions shifted in Q3 and all domestic transactions in Q4 fiscal 2015. This will continue to impact reported transaction growth rates through the 1st 3 quarters of FY 2016. As we enter the second half, U. S. Transaction growth rates will rise as we bring on USAA and then Costco volume.
Moving to client incentives. In 2015, client incentives came in at 17.1 percent of gross revenue, below our expected range of 17.5% to 18.5%. This was due to volume shortfalls in markets like Russia and Brazil, delays in renewals and some shift of dollars from incentives to gross price reductions. We anticipate a step up in client incentives in fiscal year 2016 based on renewals completed to date and renewals anticipated in 2016, as well as the conversion of USAA and Costco. Among the significant renewals completed in 2015 were core brands like Southwestern United, Wells Fargo and U.
S. Bank in North America, large issuers in Russia, Japan and Latin America. USAA related incentives will kick in midyear and Costco later in the year. In 2016, we also expect several large renewals. Our current expectation is that client incentives as a percent of gross revenue could climb to the middle of the 17.5% to 18.5% range.
The Q1 in particular should see a high level of renewal activity and the largest impact from renewals worldwide. The Q1 incentive rate will likely be at the high end of the full year range or possibly higher. With incentives growing faster than gross revenue, net revenue growth will lag gross revenue growth. In constant dollars, we anticipate fiscal year 2016 net revenue growth in the high single digit to low double digit range. Also based on all the factors I discussed earlier, the Q1 growth rate will likely be 2 percentage points lower than the full year growth rate with growth picking up as the year progresses.
As a reminder, our service revenues lag 1 quarter from payment volumes, whereas incentives are booked in the quarter in which payment volumes occur. Which brings us to the currency translation impact from a strengthening dollar. The fiscal year 2015 impact of exchange rates was a 2.5 percentage point drag on net revenues higher than we had anticipated at the start of the year. If we look at where the dollar is today and the basket of currencies we are exposed to, the FY 2016 impact looks to be 3 percentage points. The bulk of this impact is in currencies like the ruble, the real, the Venezuelan boulevard, the Argentinian peso and the Canadian and Aussie dollars.
On the expense front, we will continue to invest in key growth initiatives such as Visa Checkout, Visa Token Service and other strategic programs as well as our long term plan to bring key technology and customer service activities that are currently outsourced in house. Network related expenses will grow due to the full year impact of fees paid to NSPK for processing transactions in Russia. We will start to lap this added expense in Q4 2016. We will have significant startup costs to set up domestic operations in China. We are actively working on being in a position to compete domestically and will submit our application upon release of the final regulations.
We are assuming China startup expenses will ramp through the year. We are holding the line on cost increases in all overhead functions. In nominal dollars, we expect a step down in the rate of expense growth in fiscal year 2016 as a result of all these actions versus almost 6% growth in fiscal year 2015. Expense growth will run at a high single digit clip in the first half and substantially lower in the second half. Our tax rate in 2015 came in at an adjusted 29.3%, almost 100 basis points lower than expected due to the favorable resolution of some tax items.
As always, we have various tax initiatives underway. However, we expect our tax rate to normalize in fiscal year 2016 back to the low 30s. In FY 2015, the lower than expected tax rate added over 1 percentage point to our EPS growth. In FY 2016, the anticipated increase in the rate could be as much as a 2 point drag on EPS growth. Now that we've announced the Visa Europe transaction, we can resume our stock buyback.
It is fully our intent to step up the pace of buybacks immediately to make up for buybacks not completed in Q4 FY 'fifteen. Despite this, our weighted average share count in 2016 will be higher than it would have been had we been buyers of our stock in the Q4 of 2015. When you put this all together, we expect our constant currency EPS growth in fiscal year 2016 to come in at the low end of the mid teens range. Without the expected increase in the tax rate, EPS growth rates would be almost 2 percentage points higher. Furthermore, the currency translation impact will be higher on earnings than it is on revenue.
We project a 4 percentage point drag on EPS growth from exchange rates. This is due to 2 main reasons. 1st, a larger proportion of our expenses are dollar denominated and second, profits relative to revenues are proportionately higher in some of the harder Q1 EPS growth rate will be significantly lower in the mid single digits for all the reasons I outlined earlier. A net revenue growth rate in Q1 that tracks a couple of percentage points below the full year run rate and an expense growth rate that will run meaningfully higher than the full year run rate. EPS growth rate will step up as the year progresses, except in the fiscal Q3 when we lapped a large tax benefit last year.
As you can see, there are a variety of factors that will drive our revenue and EPS growth in fiscal year 2016. The key underlying drivers of our business remain very healthy. We expect a step up in payments volume growth, major new accounts and renewals, good expense control resulting in healthy core revenue and earnings growth in constant dollars despite a generally uneven global economy. We have several significant factors driving down our reported growth rates in FY 2016, which should moderate with time. These are a potential regression to the mean for currency volatility, the continuing strength of the dollar impacting both the cross border business and creating a currency translation drag and a return to normalized tax rates.
As the impact of these unfavorable year over year comparisons fades, the strong underlying growth momentum of our core business positions us well for robust reported growth in fiscal year 2017. We remain as bullish as we've ever been about the long term secular trends in our business. As always, we will update our views as the year unfolds and share them with you each quarter. This outlook excludes the Visa Europe acquisition. When I come back, I'll walk through the potential financial impact of Visa Europe on fiscal year 2016.
And with that, I'll turn the call back to Charlie.
Thanks very much, Ghassan. I'll try and keep my comments brief so we can move on to Europe. First of all, we're very happy with our performance both in the quarter and 2015. We continue to deliver strong results in a global economic environment, which still has more headwinds than tailwinds for us. Adjusted earnings per share growth of 14% in the quarter and 16% for the full year include the continuing negative effects of a series of items, including the translation impact of the strong U.
S. Dollar, reduced cross border volume driven by that strong dollar and continuing drag from lower oil prices. Of course, there are positive offsets including strong payment volume, healthy process transaction growth and high currency volatility. Our strong results in the face of these pluses and minuses speak to the resilience of our business model. Regarding what we see across the world, I'll keep it simple and just say that the economic environment has shown little change over the last quarter with some slight deterioration, especially outside of the United States.
Having said that, domestic activity is still fairly strong. And while we didn't get much help from an accelerating economic environment, our business still showed continued strong growth. Our longer term bullish growth outlook is intact and most importantly the underlying fundamentals of our business continue to deliver and these will continue to drive continued growth. We'll discuss capital in much more detail when we review the Europe transaction, but I do want to comment on our recent dividend increase. We've discussed our view that the dividend is an important way for us to return capital to our shareholders.
We've also said that we would hope to consistently grow the dividend as we grow the earnings of the company and the recent 17% increase maintains the payout at our stated target range of the low 20s. Most importantly, we feel it's a strong statement that we're increasing our dividend at the same time that we're announcing such a significant transaction. Now let me turn and make some comments about the fundamentals of our business. We continue to strengthen our key client relationships across the world. In the United States, we're in a great position.
Over the course of the year, we extended some of our biggest relationships which were up for renewal, including our partnership with Wells Fargo, which we renewed just this quarter. We now have partnership agreements in place with 5 of our top 6 until at least 2020. Outside of the U. S, we're also in a very strong position. We continue to expand our relationships with clients around the world.
For example, in Australia, we signed a new 10 year exclusive partnership with the National Australian Bank. While we did have some notable losses this year, we also had successes winning significant new business with Costco and USAA. I wanted to make a couple of observations about how we view pricing and share in this context.
First of
all, and most importantly, we view the big opportunity for us is to drive growth in the marketplace. And therefore, the most profitable growth is achieved by electronifying cash and check across the world, expanding participates in the electronic payments universe and helping grow commerce more broadly. We believe this is how we create real long term sustainable value. If you look at what's driven our revenue growth over the last several years, it's just that, not taking share from competitors. That's not to say that the market isn't competitive, it is.
And as you know, our competitors are very, very good and we respect them. And since we went public, we've seen clients make long term partnership decisions, some of which have benefited us, others of which have benefited others. There will be situations where clients seek to do more business with us because of our capabilities, products and brand and we will support them. We'll also defend our share aggressively. We will be competitive with the market, but we do not seek to win deals solely on price.
We do not view pricing on its own as the best mechanism to grow. So I strongly believe in focusing on long term value creation and that our future is about growing electronic payments and commerce broadly and ultimately expanding into new or underpenetrated segments. Now a few comments on the underlying business. Visa Checkout continues to gain momentum. We now have more than 7,000,000 registered users in 16 countries and over 470 Financial Institutions partners participating globally.
More than 250,000 merchants are currently live globally, including 10 of the top 50 e commerce merchants. New merchant partners include Kohl's, Best Buy, Shutterfly, Lands' End, Fanatics and Abercrombie and Fitch to name a few. We also announced that we now have built the ability for issuers and merchants to tokenize Visa Checkout transactions. We expect this to begin in early 2016 as merchants and some issuers complete the work required to enable token acceptance. Many issuers are ready now, but given the rapid approach of the holiday season, we do not expect merchants to enable token acceptance as they head into their annual their year end annual system freezes.
2nd, as you all know, we partnered with Google and Samsung to bring 2 great new mobile experiences to market. Android Pay and Samsung Pay both launched their solutions in the U. S. In September and in the upcoming months we'll roll out their programs internationally. 3rd, we continue to build out our technology capabilities to deliver differentiated services in the marketplace.
In September, we launched Visa Integrated Marketing Solutions, a card marketing platform designed to help small to medium sized issuers optimize their marketing efforts. It's a service offered by Visa Performance Solutions, which provides a range of advisory services to issuers, merchants and acquirers and is currently available to any Visa issuer in the United States interested in increasing the performance of their Visa consumer credit or debit portfolios and the platform is expected to expand globally in the coming months. Last month, CyberSource launched Decision Manager Replay, the industry's first fraud tuning analytics tool, which allows merchants to quickly analyze and adjust their online fraud management strategies. Merchants can take a batch of recent transactions and run them through the decision manager system, retesting for fraud using more or less stringent risk levels. The system can reconfirm which transactions are fraudulent and which ones have been mistakenly flagged for fraud and denied, but were in fact valid.
Looking ahead to fiscal 2016, let me just share a couple of thoughts following Vasant's. Our guidance for 2016 is reflected of several things. First of all, it excludes the impact of Visa Europe, which will make the second half of our fiscal year more complicated. We will do our best to isolate the impacts for you so you can understand the impacts discreetly and evaluate our sustainable performance. While we cannot predict the future any better than you can, we do have to make assumptions as we plan for the year.
We have shared these in a fair amount of detail with you in addition to providing the numerical guidance, but at some point you need to make your own determinations. Having said that, there are some things that I want to emphasize from Vasant's remarks. Effects of the strong dollar will have an increased negative effect on us in 2016, but there will be a point when the dollar stabilizes and we lap this effect. As Vasant said, we are planning for negative 3 point impact on revenue growth and 4 points on EPS growth in 2016 before we hope to see some improvement. Cross border weakness continues, but can change quickly with movements in the dollar and domestic economic growth.
And please pay attention to Vasant's comments on timing. While we don't usually get as specific as we've done on this call, we do have some line of sight which would suggest that some of the items Vasant spoke about should impact the early part of the year disproportionately, especially Q1. Having said that, we always look to our results and ask what has changed about our views on growth beyond the fiscal year. We continue to feel great about our opportunity to drive revenue, earnings and EPS growth for our shareholders. There's more cash to disintermediate than ever and we have more tools than ever to accomplish.
And with that, let me switch gears and talk a bit about the Visa Europe transaction. Today, as you've seen, we announced that we and Visa Europe have entered into a definitive agreement for Visa Inc. To acquire Visa Europe. We're thrilled about the prospect to bring these 2 companies together and believe the transaction will benefit all involved. I'll give an overview of the transaction starting on Page 3 of the prepared presentation if you want to follow along and Nicola will add some comments.
After that, Vasant will cover the financial aspects in more detail before we take questions on all the topics covered on the call here. We will acquire Visa Europe for an upfront consideration of €16,500,000,000 consisting of 11.5 €1,000,000,000 in cash and €5,000,000,000 in convertible preferred stock. In addition, Visa Europe member owners will potentially receive an earn out payment of up to €4,000,000,000 €700,000,000 of euros in interest. This earn out will be based on the achievement of net revenue targets during the 16 fiscal quarters following the close and provides additional upside to both parties if those agreed targets are met. It will be payable following the 4th anniversary of the transaction close.
We plan to issue between $15,000,000,000 $16,000,000,000 in senior unsecured debt to finance the transaction and establish a more efficient long term capital structure. We plan to offset the effect of the issuance of preferred stock with increased stock buybacks and believe our capital structure will still provide us flexibility to pursue future growth opportunities. And as you know, this is an attractive time to issue debt given the historically low interest rates. Our initial leverage will be between 1.4x and 1.5x gross debt to EBITDA and we target our long term leverage at between 1.1x and 1.5x gross debt to EBITDA. Based on discussions held with the rating agencies, we expect to maintain our current investment credit ratings of A plus and A1.
The transaction has been approved by both Visa Inc. And Visa Air Boards, will result from the exercise of the amended put option and does not require VI or VE shareholder votes. It is subject to customary closing conditions and transaction regulatory approvals and we expect to close in the 3rd fiscal quarter of 2016. Moving on to Page 4. Turning to the transaction rationale behind the transaction.
This is obviously strategically important for both of us. We believe the combination will create significant benefits for both European and Visa Inc. Clients. They will benefit as we work every day to earn their business, bringing them the full power of our global platform, innovative products and services, as well as our world class brand. The transaction will provide European clients with direct access to our investments in technology, differentiated products and services, capital and talent.
We'll also prioritize European needs in the allocation of our resources and we believe we can deliver a stronger set of digital capabilities than would be possible without this combination. And with that, let me turn it over to Nicolas Grim to get for him to add his perspective.
Thank you, Charlie. A few comments from a European perspective. The first one is that the time is right. Payments are increasingly global with more and more powerful competition, scale and investment capacity are also increasingly important. Adding to these dynamics is regulation which you're all well aware is a key focus for our company and industry.
We're announcing the world of payment becoming more global from consumers traveling and shopping across borders to retailers and of course many of our most important bank issuers and acquirers being more regional or global players. We're also seeing the tech giants and mobile companies launching services in the payment space here in Europe and the relationship between issuers, acquirers and merchants is changing. In terms of processing, scale is a critical driver of competitive advantage and becomes even more important in Europe with the mandatory separation of key main processing activities. If I look at it from a customer perspective, Visa Inc. Commitment to continuing to develop the European market is important for our clients, Representing 26% of total combined payment volumes, Europe will be Visa's 2nd largest region.
Our clients are reassured that there will be an empowered regional office with strong regional focus, processing in Europe and potential for investment that will be attractive to European members. From a management perspective now, the focus is on completing the transaction so that we can get on with integration. The signing is an exciting and significant milestone towards renewing the 2 parts of Visa, but up until completion, my message to the team will be that we also need to continue to deliver our strategy and the service that our members and stakeholders value highly. Continuing to deliver puts the business in the best position to benefit from the integration of the 2 organizations. Finally, I strongly believe that the uniqueness of this deal lies in the fact that our 2 companies already worked together and have done so throughout our history.
We share our brand, rules and a number of operational practices, travel facilitating our union and rational to come together.
Thanks, Nicola. Let me just make a comment about perspective from Visa Inc. This transaction does create a truly integrated global leader that will allow us to capitalize on strong growth opportunities in a highly attractive region. We also expect that it will create substantial value through revenue opportunities and cost efficiencies associated with the transaction from a member owned association to a commercial entity and the opportunity to integrate the 2 businesses. We're also confident in our execution capabilities given our experience of transitioning to a commercial model from a member owned model ourselves.
Also remember, as Nicola pointed out, we're merging 2 entities that have a close working relationship and share many common products and platforms. Let me make a few comments about our views on this financially. The transaction is financially attractive for both parties with balanced consideration of a mix of cash, stock and earn out. We expect it to be accretive to our standalone revenue and EPS growth before transition costs beginning in fiscal year 2017, the 1st full year of the combination. The preferred shares offer current VE members continuing ownership stake in the company and also serves to provide liability protection to our Visa Inc.
Shareholders in conjunction with a new loss sharing agreement with key U. K. Banks. The earn out provides additional upside potential for both parties if net revenue targets are achieved. We feel very good about the structure of the transaction since the balance consideration encourages VE's current owners and VI to work together to enhance the long term value of the business, the benefit of all parties.
Vasant will go through this in more detail in a few minutes. I think in the interest of time, I will skip Page 5, which you can read on your own, which just talks about why we think it's an attractive growth opportunity, as well as Page 6, which is this current snapshot of Visa European Business, as well as Page 7 and 8 that would show you the complexion of the new combined visa. Let me move on and talk about Page 9, which are our post acquisition plans. Before I get into the details here, just want to make a comment about our ability to execute. We've done this transition before as I pointed out when we created Visa Inc.
And have a great deal of experience not just knowledge of what's required. In addition, as I've already said, we also have people on both sides who've worked together for a long time and will benefit from those strong relationships. Since his arrival, Nikola has made significant changes to VE, which has resulted in an even closer working relationship between our two companies. He's also made changes to the business which are consistent with the way we would run the company going forward. He and I spent some time thinking about the integration process and our timeline and approach will put clients first.
In short, we know how to do this and we'll pace it properly. So turning to our integration plans, want to first recognize the shift in focus that occurs as we transition from a member owned association to a commercial entity. The nature of our relationships with clients will evolve and we will be working hard to continue to earn their business. We think we've got a fantastic platform from which to do that with innovative and differentiated products and services in addition to our world class brand. We also plan to maintain a strong European presence just as we do in our other regions.
We expect to have a local empowered leadership team in Europe led by Nicola with the European headquarters here in London. In addition, we'll invest in the country resources needed to serve clients effectively. We intend to maintain a data center in Europe and we'll obviously continue to comply with European data privacy regulations. Finally, Visa Europe comprises 38 countries and we will ensure that we have country specific strategies that are responsive to the evolving competitive and regulatory landscape. One of the strategic benefits of the transaction is that we will be able to deliver enhanced digital and mobile capabilities in Europe.
This will be an important focus post close. Our plan is to provide access to our digital solutions roadmap and partners. BE had already announced plans to roll out Visa Checkout and we're already working with them on that in the context of our existing partnership. And we can extend to Europe all that we're doing to open our technology platform, which will enable collaboration and co development of innovative payments experience. By combining the 2 companies, we do expect to get benefits of scale and efficiency, providing access to our infrastructure, products and corporate services to VE.
We will fully integrate the VI and VE systems, which we expect to take 3 to 4 years as we work carefully with our clients to do this properly. On the pricing side, we believe there is an opportunity to expand yields in Europe as we align the economic model with the value we bring and generally evaluate pricing from the perspective of a commercial enterprise rather than a member owned association. However, we will be careful to remain competitively priced for our clients. It's obviously a very competitive environment and please remember that it wouldn't be intelligent for us to telegraph our specific plans. So we're not going to talk any more about the specifics about pricing and yields.
And with that, I'll hand it over to Vasant to go through some additional details about the transaction.
Thank you, Charlie. On Slide 10, we outlined the financial impact of the acquisition on Visa. Assuming the transaction closes on April 1 next year, 2016 will be a stub year with 2 quarters of Visa Europe in our numbers. We expect low single digit percentage point EPS dilution in fiscal year 2016 before one time integration costs. There are three reasons for this.
First, we will be issuing preferred shares, which at the time of issue will on an as converted basis amount to approximately 80,000,000 shares of our Class A shares or 3.3 percent of shares outstanding. This creates almost $0.025 of EPS dilution each quarter till we buy back an equivalent amount of Class A shares. We will be stepping up our stock purchases over and above our normal course buybacks to offset this dilutive impact. Our plan is to do this through open market purchases over 6 quarters post closing. In other words, we expect to have bought back an amount of our Class A shares equal to the preferred shares issued on an as converted basis in addition to our normal buybacks by the end of 2017.
As you may expect, the dilutive impact of the shares issued to Visa Europe members will be greatest in the second half of twenty sixteen and taper off through 2017. 2nd, we expect to issue $15,000,000,000 to $16,000,000,000 of debt with maturities from 2 to 30 years. We're putting in place a long term capital structure. The weighted average cost of this debt could be around 3% to 3.5% depending on market conditions. We are working with Visa Europe to prepare the required financial information, which will include unaudited pro form a financial statements reflecting the combined entity under U.
S. GAAP for fiscal year 2015. Market conditions permitting, we could be in the market in early December. Interest on the debt is expected to cost us $0.03 per share per quarter. This is $0.03 of dilution in the Q2 of fiscal year 2016 if we have the debt in place 3 months before we close.
3rd, we're not assuming significant benefits from revenue and cost actions in the second half of twenty sixteen. We will have some benefits, but they will not be material enough to offset the dilution from the stock and debt issued until 2017 and beyond. As we get to closing, we will refine our estimates and be able to give you a better sense of the impact on 2016 EPS. In fiscal year 2017, both revenue and cost benefits accruing from the acquisition will start to kick in and the dilutive impact of the share issuance will fade away. It is our current projection that Visa Europe will be accretive in fiscal year 2017, our 1st full year as a combined entity.
2017 accretion is expected to be in the low single digit percentage points range before integration costs. We will provide non GAAP numbers that adjust for one time costs associated with the restructuring of Visa Europe as we integrate it into Visa. We are working on purchase accounting and its associated impact on our financial statements. It is our current expectation that the bulk of the purchase price will be allocated to indefinite lived intangible assets, which will not be amortized. Other than adjusting for one time integration costs, we do not plan at this point to move to cash EPS reporting.
Once again, we will provide more clarity as we get to closing. We expect the full integration to take until the end of 2020. As Charlie indicated, net revenue yields are expected to expand as we move to market based pricing over time depending on client competitive and regulatory factors. On the cost front, the majority of the savings are derived from the technology integration, which requires the most time. As such, technology driven savings will be largely realized after 2017.
We will have savings from organizational integration in 2017 2018, but we will also be making immediate investments in deploying our digital initiatives and enhancing our client service model. We expect all the revenue and cost synergies from the Visa Europe transformation to be realized by 2020. In 2020, we would expect high single digit percentage point EPS accretion and Visa Europe operating margins to be comparable to Visa Inc. Margins. In total, we're targeting $200,000,000 in cost savings, a roughly 30% reduction from the current run rate.
When we look at the current run rate, we exclude the royalty that Visa Europe is currently paying us. This is included in their reported expenses, but as you know, it is not a cost reduction for the combined entity. We also exclude non cash depreciation amortization expenses. While we reduce costs where we can leverage Visa Scale, we will also be adding costs as we invest to bring our digital capabilities to our European clients as well as to enhance the service we offer them at the local market level. As Charlie indicated, we will continue to operate with London as our regional hub much as we do today in Singapore, Dubai and Miami for our other international regions.
We will also retain a data center in the EU. To fully integrate Visa Europe, we will incur $450,000,000 to $500,000,000 in one time costs over 3 to 4 years. The bulk of these integration costs will be incurred to complete the technology transition. As I mentioned before, we will specifically identify these costs each quarter and update future estimates as needed till the integration is complete. We will have some one time cash and non cash charges coincident with the closing of the transaction.
Cash closing costs are estimated at approximately $150,000,000 which includes stamp duties payable in the UK plus the usual contingent fees paid to bankers, lawyers, etcetera. Since the put will cease to exist at closing, we expect to reverse the put liability currently on our books, a one time non cash gain of $255,000,000 Also, under U. S. GAAP, the royalty fee currently paid by Visa Europe is deemed to be below market. At closing, we have to establish the value we are realizing or implicitly paying Visa Europe to end this arrangement.
As a result, we expect to record a $1,500,000,000 to $2,000,000,000 non cash write off of the purchase price to reflect the settlement of the existing franchise agreement. Once again, we will have more precise estimates as we get to closing. Visa Europe operates as a U. S. Taxpayer with a 35% tax rate.
As you know, Visa's effective tax rate is currently below this. As such, our blended tax rate will increase modestly post acquisition. As always, we will work on tax planning initiatives to reduce our tax rate over time. Moving to Slide 11. As you've said for many years, we will put in place a long term capital structure coincident with this acquisition.
We intend to issue $15,000,000,000 to $16,000,000,000 in debt with maturities ranging from 2 to 30 years. The size of each tranche will be adjusted based on market conditions. Our plan is to issue in the U. S. Market in U.
S. Dollars for best execution. Our gross debt to EBITDA ratio could rise to 1.5 times immediately post the acquisition. It is our plan to manage our long term gross debt to EBITDA ratio in the 1.1 to 1.5 range. Based on our conversations with the rating agencies, we expect to maintain our current A plus A1 ratings at these leverage levels.
Of course, our net debt to EBITDA ratios will be significantly lower at all times given the cash we hold for settlement as well as any offshore cash. We could have used offshore cash to fund part of this transaction, but have chosen not to do it at this time. Post closing, we expect to put in place alternative structures that will allow us to achieve the same goal in a more logical and tax efficient manner. As I indicated earlier, we will use proceeds from the debt offering to fund the upfront cash payment to Visa Europe members as well as to increase stock buybacks through 2017 to offset the preferred stock issued. The capital structure we will have in place will not only be more efficient, but will also not restrict our future flexibility to invest in growing our business organically, to fund appropriate M and A and to maintain our philosophy of returning excess cash to shareholders through dividends and buybacks.
Slide 12 provides a summary of sources and uses of cash. It's important to note that we expect to have approximately €2,000,000,000 or €2,300,000,000 of cash on the Visa Europe balance sheet, which will transfer over to us at closing. This cash is freely available for settlement or general corporate purposes as needed. As I mentioned earlier, post closing, we will work on restructuring some of the new entities to put in place mechanisms that will allow us to use excess cash we have offshore more efficiently. In terms of the upfront cash consideration, which is to be paid in euros, we plan to hedge a portion of our euro exposure between now and the close of this transaction.
Moving to Slide 13. PISA Europe members can realize a total value of up to €21,200,000,000 at the end of 4 years. Almost half this value is in the form of the earn out and preferred shares. The earn out provides additional upside potential to both parties if agreed net revenue targets are met cumulatively over 16 quarters post closing. Preferred shares give Visa Europe members a continuing stake in Visa and the opportunity to benefit from the value we can create in Europe and globally.
The preferred shares also provide a funding source for legal fees and litigation settlements if we have them in the future. As we do in the case of the Class B shares, we will adjust conversion ratios to account for any payments made. There will be 2 series of preferred stock issued, 1 to U. K. And Ireland members and the second to all other members of Visa Europe who are eligible to receive preferred stock.
We will have an additional layer of coverage in the UK under a loss sharing agreement with 11 of the largest UK members to directly fund settlements for domestic claims after certain levels of losses are paid from the UK and Ireland preferred stock. There will not be any additional indemnities in the UK for domestic claims. Outside the UK, the second layer of coverage will come from existing indemnities, which will remain in place. This mechanism is designed to fund legal expenses and settlements, if any, related to interchange in the Visa Europe territory. Specifically, potential losses based on domestic and EU rates up to the value of the preferred shares are covered 100% by this mechanism as are 70% of potential losses based on inter regional rates.
In the UK as necessary, Visa Inc. Can rely on additional protection under the LSA for 91% of claims related to domestic interchange. Slide 14 describes how we expect to account for the earn out and the preferred shares in our financial statements. The earn out will be accounted for as contingent consideration. The fair value of the obligation will be recorded as a liability on our balance sheet at closing based on a probability rated estimate of the payout.
Each quarter, we will mark this liability to market based on a revised view of the probability and size of the payout. This quarterly adjustment will be recorded as non operating expense or income over the 16 quarter earn out period post closing. As a reminder, all these amounts will be non cash until the 4th anniversary post closing. At this point, a cash payment will be made to Visa Europe members up to a maximum of €4,000,000,000 plus up to an additional €700,000,000 of interest depending upon the cumulative net revenue performance of the business over the earn out period. The preferred shares will be recorded as equity at close based on the value of Class A share equivalents at €5,000,000,000 with a small discount to reflect the restrictions around transferability of the shares.
If covered litigation payments are made or legal expenses are incurred, the conversion ratio of the preferred shares is reduced with an offset to litigation of professional fee expenses. In addition, we expect to record the 2 non cash charges I mentioned earlier. With that, I'll turn this back to Charlie.
Thank you, Vasant. In summary, we're delighted to be reuniting the Visa family. We believe that we've structured this in a way that creates value for both Visa Europe members, our shareholders and our clients globally. Before I turn it over to Jack, first I want to thank both the Visa Europe team and the Visa Europe Board. To the Visa Europe team, congratulations on the great company you've built.
Thank you for all that we've done together to this point and we look forward to being your partner as one combined company. And to the Visa Europe Board, thank you for the energy, patience, detailed work and the way in which you focused in a balanced way on delivering both short and long term value to your members. We'll work hard and I'm confident this combination will deliver both short and long term benefits to your members. And with that, Jack, we'll turn it back to you.
Thanks, Charlie. Dexter, at this time, we're ready to start the Q and A session. And I would like to just ask all of the folks listening to data to limit yourself to a single question, so as to provide more folks the opportunity to get on the call. Dexter?
I would now like to turn the Our first question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is open.
Great. Charlie, I heard you loud and clear that you don't want to talk about pricing. But one of the concerns that's been expressed is that banks, once they kind of get there, once the check clears, would want to leave. Could you talk about obviously, you've got the earn out payment and the preferred. Could you talk about how you thought about that structure in terms of the long term partnership with the current banks that make up Visa Europe?
Sure. I mean, let me start and Vasant can obviously chime in. Listen, I think as we've as both Vasant and I each talked about, we think the structure very much aligns the interests of us doing what makes sense for Visa Inc. As well as doing the right thing on behalf of the former members. And as I said, we live in a competitive world.
We understand what goes on, but at the same time, we are going to have to transition from a member owned structure to one which is different than that. So again, all I can say is that we're very, very conscious of both sides of the dynamics, which is there's opportunity for us as a combined company, but we also have to do it very intelligently and very carefully in a way that our clients understand and at this point probably expect given all of the conversations directly that we've had with the Board.
Next question, Dexter.
Okay. Our next question comes from the line of David Togic of Evercore ISI. Your line is
Thank you and congratulations. Can you give us a sense of how the $200,000,000 in cost savings will layer in approximately between FY2017 and FY 2020?
Sure. So as I said in the comments, in 2017, mostly we will sort of look at the global platform that Visa Inc. Has and seek to integrate from an organizational standpoint Visa Europe into Visa Inc. There will be some adjustments in 2017. But then the bulk of the savings, as I mentioned, really come from harmonizing the 2 technology platforms.
And what we will be doing in 'seventeen is really working on harmonizing the platforms. And then as Charlie said, very carefully transitioning over to our new platform. We will run both platforms for a period of time, which is where some of these integration costs come in. Technology related savings will kick in mostly in 2018 and beyond, with the bulk of them in place by the end of 2019 and into early 2020. So the savings pick up over time and that is sort of factored into the sort of the outlook we've given you.
We will have accretion next year. When I say next year, I mean in fiscal year 2017. And then we expect that we will be in the high single digit accretion range by the time we're done with all the integration.
Let me just add to that just a little bit of color around the reason why the conversion takes the amount of time that it takes. What we're not doing is just taking the existing platform we have and asking all of Visa Europe's clients to convert to that. The work that we have to do is to go through very carefully and understand what needs to get build out in the Visa Inc. Systems to accommodate everything which is very specific for the European clientele. We then need to go build it and then we need to have a conversion plan in place that works on behalf of clients.
And the other thing I would just also mention in case it wasn't entirely clear is, we will almost immediately post the closing, make investments to bring our digital capabilities to our European clients like Visa Checkout, as well as make investments to provide a level of service at a local level and enhance what we have today. So there will be investments happening fairly quickly in the process too.
Next question, Dexter.
Okay. Our next question comes from the line of Sanjay Sakhrani of KBW. Your line is open.
Thank you. I guess, Vasant, I heard you say, I think, that Visa Europe and Visa Inc. Margins you're assuming will be equal at some point in time. Could you just talk about whether or not there might be some deviation in that? Just figure that you might be able to extract more synergies from Visa Europe on a combined platform?
Thanks. Yes, I think what you've got is our best sense of things at this point in time. Obviously, as one gets into this and we go into years 2 3, we'll learn more about all the possibilities in terms of both what we can do on the cost side, what we can do on the revenue side and so on. I think this is, at this point, I think the best point of view we can offer you. And when you adjust for the royalty that Visa Europe is paying us, when you look at the cost savings we can generate, it gives you a sense of where margins can get to from where they are.
And so we feel good that by the time we're done with the integration, Visa Europe margins should be in the Visa Inc. Range.
Next question, Dexter?
Our next question comes from the line of Don Fendetti of Citigroup. Your line is open.
Yes, thank you. Kind of shift gears to the core business. Charlie, the cross border business obviously is probably one of the highest margin areas of the company, continues to be light, I guess, even after the quarter. Do you think we've troughed here? Or is your sense that you could tick a little bit lower?
Well, listen, I mean the easy answer is we really don't know. There's been continuing weakness, and in the early part of this quarter is slightly below where we were running. But that's a call on as Vasant talked about in his remarks on the strength strengthening, weakening of the dollar and broader economic impact. I do want to say relative to cross border, when you think about what we have to offer and what our competitors have to offer, cross border payments is hugely value added. It's something that we'll experience the kind of volatility that we've seen given the impact of the dollar on people's ability to spend, but it doesn't change the long term value that we provide in cross border.
And we believe that ultimately translates to volume as these things evolve over time and also as we start to lap decreases that we've seen. Thanks.
Next question, Dexter.
Our next question comes from the line of James Schneider of Goldman Sachs. Your line is open.
Good morning. Thanks for taking my question. Charlie or Nicola, could you maybe comment specifically on whether the agreement includes any terms whereby the owners of Visa Europe re up for a certain length of time and agreed to remain at a certain issuance volume level
or
card level with Visa Inc?
Listen, there are agreements in place in Visa Europe that stay intact and we work commercially beyond that. Beyond that, you can look at the structure yourself and see what that provides for.
Next question, Dexter?
Our next question comes from the line of Darrin Keller of Barclays. Your line is open.
Thanks, guys. Look, just
on the financing side, you're bringing on roughly $15,000,000 to $16,000,000 in unsecured debt versus I think about $12,000,000 upfront needed. And obviously, you're bringing out you're using another $5,000,000 from preferred. I think you said you mentioned in past you've had about $5,000,000,000 plus of foreign cash and I know you mentioned you're not using it now. So just when you think about all the cash you have there, plus $7,000,000,000 plus of free cash flow annually, can you just comment on the incremental buyback potential in addition to the $5,000,000,000 authorization you mentioned that we could potentially expect to see maybe even above and beyond the preferred?
Yes. So as we said earlier, we will borrow more than the cash that is paid out to Visa Europe upfront. We will use that additional cash to step up our pace of buybacks. Our goal is to buy back the equivalent Class A shares to offset the effect of the preferred shares issued over 4 to 6 quarters post the closing, so by the end of 2017. We will have more flexibility in the use of our offshore cash post the closing.
We have a variety of plans that we expect to put in place and as they fall into place, we'll talk to you about it. The goal would be then to have not only have more freedom to move the offshore cash, but also to move it efficiently and with minimal friction costs. I should also make sure you remember that we do keep cash available as a backup for our settlement, our daily settlement process. Some of that offshore cash today is used for that purpose. So you shouldn't assume that all that is excess cash.
Next question, Dexter?
Okay. Our next question comes from the line of Jeff Kupferberg of Jefferies. Your line is now open.
Hey, guys. Wanted to get
a sense of how much revenue synergy is assumed in the fiscal 2017 and the fiscal 2020 accretion projections? And just directionally, how much of that might be expected to come from improvement in the net revenue yields versus other general sources of top line synergy like cross selling?
As Charlie said, we don't plan to talk much about specific pricing plans for obvious reasons. But as you work through sort of some of what we've told you, clearly, when you move from an association model, you would expect there to be improvement in net revenue yields. How much, how fast, exactly how, I think we've given ourselves the ability to do it in the way that makes the most sense competitively and otherwise. And there's not a whole lot more about this that we plan to talk about publicly, but you will see as we go along how things evolve.
Next question, Dexter?
Our next question comes from the line of George Mihalos of Cowen. Your line is now open.
Great. Thanks for taking my question and congrats on the deal guys. Wanted to start off going back to the core business. How do you guys think about improvements in the net revenue yield given some of the puts and takes around cross border, some large business coming up with Costco and the like? Your thoughts about being able to drive that higher over the intermediate term?
Well, as you saw, I mean, we had pricing last year. We'll get the benefit of that pricing in the first half of fiscal year 'sixteen also. Clearly, the mix of the business with growth we have happening outside the U. S, which is a higher net revenue yield business, The mix of the business improving in terms of e commerce and so on helps yields. We'll always look for opportunities where we create value to price to that value.
And over the past 3 or 4 years, you've seen some steady improvements in net revenue yields. So as Charlie said, I mean, fundamentally, we like what we see in our business. The underlying trends of the business remain as good as they've ever been. We have some short term, what we consider to be transient drags on the business on a reported basis from some of the reasons I outlined. And then we have, as you see happening from time to time in this business, we have some big new wins, some big new renewals happening that have some impact in the early years and early quarters of those renewals and wins.
I would just add to that. First of all, I obviously agree completely with what Vasant said. When we talk about the specifics, the way we're thinking about 2016, they are driven by some very, very discrete and very specific items that don't continue for the long term in this business as opposed to what we do believe is the strong underlying growth that you'll see especially as we get to the latter half of '16 in the domestic business and then ultimately in the cross border business. And that's really what positions the core business to continue growing. But what I really do want to just it would be remiss if I didn't point out is, with commerce moving to digital platforms as we're seeing, we have more ways to involve ourselves in that commerce than ever before.
And as we stood here, when this company went public and we talked about what we were going to do to attack all of the cash that was still in society, the things that we're talking about now, especially as it relates to mobile, didn't exist to the extent they do today. So as we think about our ability to tackle and take advantage of disintermediating net cash and continue to provide value added services alongside that, that's not in how we're thinking about 2016 or probably 2017, but that's what we come to work every day to try and drive and why we feel so good about the long term growth that still exists in the business.
Next question, Dexter?
Thank you very much. Our next question comes from the line of Craig Moeller of Autonomous. Your line is now open.
Yes, hi, thanks. Considering the strong appearance of underinvestment in the Visa Europe platform since the recession. I was hoping for an honest assessment of where you see their capability now versus Visa globally. And also if you can discuss the intense regulatory scrutiny that this deal is likely to come under, all things considered? Thanks.
Yes. Let me take a shot at the first one and then Vasant you can chime in on the second. Vasant, the first one, I personally think it's like a gross overstatement to talk about whatever words, Craig, you use to describe Visa's Visa Europe's investment since the recession. My view again, I've only been here 3 years, and I'll tell you in the 3 years that I've been here, it was I guess a year into that or so that Nicola joined, we have been working extremely closely together on leveraging our platform at Visa Inc. To help Visa Europe's clients.
In addition to that, I'm speaking for him, but he can certainly chime in, he's sitting right here. He's been fairly aggressive about coming in and thinking about running the company the way you would think about running a for profit company. And if those things together result in a lower expense base, so be it. That doesn't that does not mean that they're not investing in the future of the company. I actually think just the opposite in a lot of what we're seeing.
Having said that, even with all that he's been able to do as a standalone business, it's a small portion of what we'll be able to deliver as a combined company, both in terms of efficiencies and additional capabilities.
Yes, that's a very
good answer. I don't think
I have anything specific to add to that.
And on the regulatory front, obviously, we've been in touch with the various authorities. They are aware of what has been underway. We have been in touch with them even as we got to this announcement. If you look at it from a regulatory standpoint, Visa Europe as part of Visa Inc. Now has access to substantially greater financial resources, which makes it a financially much stronger player.
Whether if there's any concern around settlement risk management, the resources available now are vastly bigger. If it comes to concerns about cybersecurity, etcetera, you now have Visa Inc. And all our capabilities available to Visa Europe on an unfettered basis. So when you look at all that, we think this makes Visa Europe far more stable and stronger from a regulatory standpoint. We have indicated, as Charlie did, that we will maintain, as we have with all the other Visa businesses, a very large local presence in London and increase our local presence in many of the other key European markets.
And we will continue to have a data center in the European Union and comply with all the regulatory requirements. So we really think that this is a big plus from the standpoint of what regulators care about.
Next question, Dexter? Hold on. Hey, Jack. Hold on. Let me just add to that for a second.
Sure.
Just to be really specific for a second. When we look at the specific regulatory approvals required, there are 3 antitrust controlled filings, which will take place. It's the European Commission, the Turkish Competition Authority, and the Jersey Competition Regulatory Authority. And when we think about what this means for competitive reasons, we're very, very confident that we will get through this process in the timeframe that we spoke about. And then what Vasant is talking about goes even goes beyond regulatory approvals required.
It goes to the fact that our combined company and the way we intend to run it is very consistent with what we believe European regulators want out of this company.
Thank you.
Next question, Dexter.
Thank you. Our next question comes from Michael Palmer. Sure. Sure.
For O'Hashi, it was the best I've ever seen. I don't want to embarrass the guy sitting next to me.
Okay. Our next question comes from the line of Tom McCrohan of CLSA. Your line is now open. Hi, guys. Visa checkout seems
to be pretty significant initiatives here in the United States. I was wondering if you could share with us the conversations, dialogue you're having with the European banks and their willingness to embrace that as well in the 38 countries in Europe.
Nicolas speaking. I think we've just started the process of talking to our customers about these at checkout and they like the fact that it will be a common approach between what used to be up to now to Visa, to different Visa company. And having said that, once again, we're very early in the process. So we see how it goes, but I see no reason why they shouldn't like it.
And let me just add just because I think this is second nature to Nicola, but for the rest of us it's different than the environment we operate in. When decisions like that are made at Visa Europe, they are made with a great deal of effort from the Visa Europe management team, but I would describe it as deep involvement from the Board, which includes some of the most significant and a fairly wide representative group of the clients that exist within Visa Europe. So it's not management on their own making a decision to do something. It's done management with the Board that do in fact represent the existing clients.
And there was a lot of scrutiny from the Board on this specific topic.
Excellent. Dexter, next question
please. Thank you. Our next question comes from the line of Jin Ji Won of JPMorgan. Your line is open.
Thank you so much. Just want to, I guess, trying to assess how the terms of the earn out tie with the accretion targets that you set. I heard the revenue targets. How about costs and the timely execution of the synergies of $200,000,000 that you called out? Are they stipulated anywhere?
Again, just trying to gauge how visible the synergies are on the cost side. Thanks.
So Tien Tsin, as we disclosed, the earn out is linked to net revenue targets. So cost is not figured into it. Net revenue, we think, as you all know, reflects significantly value created in this business. It's also relatively easy to track. And the whole purpose of the earn out is that if this business has greater value, then both sides benefit from that value.
Next question, Dexter.
Thank you. Our next question comes from the line of Paul Tucker of Egerton Capital. Your line is open. Mr. Paul Tucker, your line is now open.
Paul, are you there? Dexter, let's move on.
Okay. Our next question comes from the line of Smedy Sykmarole of Susquehanna. Your line is open.
It's Smiti from Morgan Stanley. Charlie, just wondering if you could share more details or give us more of an update on the China opportunity. More granular details on when you could potentially get a license? And also can you share with us some of your early thoughts in terms of how you plan to address the issuing and acquiring side over there?
Yes. Listen, as far as timing goes, there's not there's really not anything additionally to talk about, otherwise I certainly would have covered it. We cannot submit our application until the final regulations come out. As best we understand, they're actively being worked on within the Chinese government. But again, it's up to the Chinese government, not up to us.
Within our company, you can imagine that we are not sitting around and waiting for that event. We've got a tremendous amount of work going on inside the company of people working on both an application because there are a series of models out there for industries which have been opened up to competition. So we've done a fair amount of work on being prepared for that as well as there's a fair degree of a fair line of sight relative to what, our operating environment will have to look like within China. And so we've got a team of people working on being in a position to have that in place in the timeframe that's outlined in the licensing process. And then we've got our China team working on just what you asked, which is what our strategy is to grow the acquiring side of the business because we've got a very, very big gap between where our cards are accepted and where union pays are in the physical world as well as the big opportunity that exists in the online space.
And on the issuing side, as I pointed out many times, we have fairly deep relationships with Chinese banks as evidenced by the sizable cross border business that we have today. So our domestic plans are regular part of the conversations we have with the issuers. So that's a very long way of saying we've got active plans that we're working through, but obviously we can't do anything until we're able to submit our application, and then, see what the Chinese government decides from there.
Okay. Thank you.
Next question, Dexter.
Yes, sir. Our next question comes from the line of Jamie Friedman of Susquehanna. Your line is open.
Hi, thanks. Nicola, in your prepared remarks, you had mentioned that relationship between issuers, acquirers and networks in Europe are changing. I was wondering if you or Charlie could elaborate on that. I know
it's an open ended question, but your insights would be appreciated. I think one of the points that will be changing due to regulation is the relationship with the retailers and therefore with the acquirers. And that's the point I was referring to. Once again, this will come up from the new regulation that we have, as you know, in Europe. And we will see that happening
during next
summer. My last comment maybe would be the fact that from our competition perspective, this might open a different approach to retailers. That's what I was referring to.
And the only thing I would add is, those of us those of you that have been following us for a while have heard us talk about the efforts that we have underway on the merchant side of our business. And we're very hopeful that the solutions like what we announced with CyberSource this past quarter will be all applicable within Europe to help build those relationships and ultimately the acquiring side of the business. Thank you.
Next question?
Our next question comes from the line of Bryan Keane of Deutsche Bank. Your line is now open.
Yes. Hi, guys. Just a follow-up on that. How do you guys believe the new European regs will impact Visa Europe? Will there be some positives and negatives and does it come out neutral or do you guys come out more on the positive end or negative end?
Thanks. Listen, I think I guess a couple of things. Number 1 is relative to the timing of the transaction for us, there's a fair amount of clarity at this point on what the environment looks like. So as we think about the way we forecasted the impact on our company as a combined entity, it takes into account what we believe the pluses and minuses are of the regulatory environment. When you look at things like the separation of scheme and processing where the final regs haven't been released, but there's pretty clear direction where things are going.
It's like anything else in life. There are potential pluses and potential minuses. And what we've got here is the ability to be very proactive about thinking through how we're going to make it a plus for us. And I think that's as much as I want to say at this point.
Next question please.
Thank you. Our next question comes from the line of Ken Bruce of Merrill Lynch. Your line is now open.
Ken?
Hi, can you hear me? Yes. Sorry. Okay. Charlie, I know you're reluctant to project too much here, but you point out the experience that you've had or Visa's had in terms of converting from a bank association.
And I'm wondering, should we look back to that as a Visa Inc. Transition as being a blueprint or a as
an
as an I think the short answer is on most things, no, other than what we learned as we went through that in the training that the people at Visa Inc. Have had on both sides on being on the Visa Inc. Side, call it the U. S. Based part of the business as well as the strong contingent of non U.
S. People. We've just been through it and know how to do it. When we talk about like our lack of willingness or whatever words you use to talk about specifics, I actually think we're being pretty clear here. What we're not doing is we're not telling you the specifics of what we intend to do on price.
And again, as I said in my prepared remarks, I hope you understand that that's the smart thing for us to do as opposed to lay out exactly what you're going to do. By the way, I can't imagine a company in any industry that would think that's a smart thing to do. So what we've done is in lieu of that is we've given you what we think the expense synergies are. We've laid out what we think our capital actions will be. So you can get to your own point of view on what that means for our share count.
And we've given you what we think will happen all in all relative to EPS accretion at different points in the transaction. So if you have all that, you should be able to do the revenue number and behind that is what we believe we'll do overall in pricing. So again, what we're trying to do is be fair and transparent for this transaction because it is a different kind of transaction starting from a different place in a different environment, both competitively and from a regulatory perspective. But so the case is built specific for this transaction. But we're trying to create that balance of being as transparent as we can while not giving away anything competitively.
Next question, Dexter.
Thank you very much. Our next question comes from the line of Lisa Ellis of Bernstein. Your line is now open. Hey, guys. Taking a step back from the details of the transaction, when you look out to 2020 and beyond, what effect do you think your Visa Europe acquisition as well as the regulatory changes in Europe will have on the underlying secular dynamics in Europe, meaning adoption of card, adoption of digital, kind of mix of credit and debit?
There's some sharp differences between some areas of Europe and much of the rest of the
world? Listen, there are. And I think, I guess broadly speaking, what I'd say is, and I know you all know this, but anytime there is stronger competition, there's an ability to drive greater results. And so whether that means that because we are able to bring the capabilities that we have today and that we're able to continue to develop based specifically upon the European needs, that will allow us, we believe, to drive deeper penetration than Visa Europe would have been able to do on its own just because of the resource constraints that they had. As we become stronger here, our competitors have become stronger here as we've seen in other parts of the world.
Ultimately and we get I know you all spend a lot of time comparing us to our competitors. We do as well because we want to learn and because we compete with them every day, but the reality is the stronger we each become, the stronger we make the other. And you see that as being evidenced in how the swiftest that we move in market in the marketplace and the types of things that we are doing. And if you look at the types of things that we're doing as a company or Mastercard is doing as a company, I don't believe that those things would have been in market if we were continuing on as associations. So we do think that there we will bring more competition to this market.
The competitors will respond, knowing that there's more competition. But our belief is there's still a tremendous amount of opportunity to electronify payments in the marketplace and we've got a greater ability to do that as a combined entity. Yes.
The only other thing I would point out is despite all the troubles that Europe has had economically in the last 5 years, as you've seen from Visa Europe's reported numbers on payment volumes, there's been very healthy payment volume growth through that entire timeframe. And there still is a very large opportunity, as Charlie said, in Europe, in the 38 countries that will now be part of Visa Inc. To disintermediate cash and check. So we're very excited about that kind of opportunity that was previously not part of not available to Visa Inc. Shareholders.
Dexter, at this point, we have time for one final question.
Thank you very much. And the last question is coming from Jason Deleeu of Piper Jaffray. Your line is now open.
Yes, thank you. And I want to ask a question on Chase Pay and the announcement with MCX. Does that agreement change Visa's interaction with Chase or just a general payments transaction at all? And are you hearing from any other large issuers that are now more interested in arrangement like ChaseNet?