MasterCard, Visa settle Discover suit for $2.75 bln

By Dan Wilchins and Emily Chasan

NEW YORK (Reuters) - MasterCard Inc (MA.N) and Visa Inc (V.N) said they agreed to pay credit card issuer and network Discover Financial Services Inc (DFS.N) a total of $2.75 billion to settle a lawsuit over anti-competitive practices.

The payment is big enough to potentially force Visa to issue more shares, and has triggered a lawsuit by Discover's former parent, Morgan Stanley, (MS.N) which says it is entitled to $1.2 billion of the proceeds.

Discover sued credit card networks MasterCard and Visa in 2004 for harming its business by preventing banks that issued MasterCard and Visa cards from also offering Discover cards. Discover's lawsuit was similar to one American Express Co (AXP.N) filed in 2004, which MasterCard settled for $1.8 billion in June and Visa settled for about $2.1 billion in November 2007.

Just before the Discover suit was scheduled to go to trial earlier this month, the companies agreed to settle. On Monday, the companies disclosed the size of the settlements and other terms.

Under the settlement agreement, Visa will pay $1.89 billion, the company said in a statement. MasterCard said it will pay $862.5 million. Discover had sought $6 billion in damages from the two companies.

Visa set aside $3 billion of proceeds from its initial public offering in March to cover some of its potential litigation expenses. With the American Express and the Discover settlements, Visa is now paying out more than $3 billion, which according to the prospectus from the company's initial public offering could spur it to issue more shares. Visa's nearly $20 billion IPO in March was the largest ever U.S. stock market debut.

LITIGATION AFTER THE LITIGATION

Discover, which was spun off from Morgan Stanley last year, has said in regulatory filings that it agreed to pay Morgan Stanley the first $700 million of proceeds it receives from a settlement, and half of any proceeds it receives above $1.5 billion, with a maximum potential payment of $1.5 billion.

But Discover said in a statement on Monday that Morgan Stanley is in breach of the agreement, and the amount it will pay to its former parent "is a matter of dispute."

Morgan Stanley said in a statement that it is due to receive $1.2 billion pre-tax from the settlement, and "there is absolutely no basis for Discover's claim that the agreement was breached." The bank said it filed a lawsuit last week in New York state court seeking a declaratory judgment to resolve the matter.

Morgan Stanley (MS.N), Discover's former parent company, will repay MasterCard $35 million and repay Visa $65 million, the companies said.

A person familiar with the matter said those payments were concessions Morgan Stanley made to help get the settlement done.

MasterCard said it will make the payments in November and receive the payment from Morgan Stanley in the same month. MasterCard will take a net after-tax charge of $515.5 million in the third quarter of 2008, it said.

The size of Visa and MasterCard's respective payments was based on their transaction processing volumes.

(Reporting by Emily Chasan; Editing by Andre Grenon and Carol Bishopric)