The proposed acquisition of NYSE Euronext by Intercontinental Exchange (ICE) would be highly profitable for ICE leading to a 10% plus increase in ICE stock according to a preliminary analysis by financial services firm Keefe, Bruyette & Woods (KBW).
“If the price of $33 discussed in the press is accurate (actual price is $33.12),then we think a cash stock mix deal would be highly accretive for ICE (10%+), notes KBW analyst Niamh Alexander in the report. “With ICE's multiple, large cash generation capacity and access to cheap debt, we think a deal for all of NYX would work.”
Matt Simon, senior analyst at TABB Group, says the fact that NYSE is losing its independence has caught people off guard. “[The NYSE] has been an iconic symbol of our industry since basically trading began. In that standpoint, when you see the news headline you get struck a little funny,” Simon says.
Simon views it as a major step up for ICE. “By making this acquisition, [ICE is] gaining a [greater] international footprint, two U.S. options exchanges, diversifying their asset base and a very iconic building,” he says. “When you start adding those things together, it makes a lot of sense for ICE.”
Rich Repetto, principal with Sandler O'Neill and Partners, says, "The transaction brings interest rate futures to arguably the most innovative CEO (ICE's Jeff Sprecher)in the exchange space. It also better positions ICE when Dodd Frank gets implemented next year."
Repetto adds that the deal takes NYSE out of a very dismal environment of low volumes, onerous European regulation and higher capital requirements for clearing, which was was weighing it down.
Recent megamergers have failed to pass regulatory muster, particularly those involving the venerable New York Stock Exchange.
This February the European Commission blocked a merger of NYSE Euronext and German exchange operator Deutsche Boerse. According to the Commission, the deal, which had already passed several regulatory hurdles in the United States and Europe, would have created a “quasi-monopoly” in exchange-traded European derivatives.
A joint unsolicited bid on NYSE Euronext with a patriotic appeal was made by Nasdaq OMX and ICE in 2011 after the NYSE/DB deal was in the works. That potential merger was rejected in the United States on antitrust grounds.
Alexander does not believe there would be any antitrust issues holding up a ICE/NYSE deal as what happened with the Nasdaq/ICE bid.
“NYX has a small commodities futures complex in Europe that might overlap, but we expect exiting that would not be too material to the potential earnings,” she noted. “Otherwise, we see no regulatory issues; there is no overlap in the listings or cash equities business.
Simon doesn't foresee antitrust hurdles. "The gut reaction that everyone has been saying is that because this is a U.S. company and the competition is in the U.S. markets — especially in the futures market. It’s hard to start putting together any sort of anti-competitive or monopoly case against the deal," he says. "There obviously will be a long evaluation process they will need to go through to get full approval, but there’s nothing that strikes me as being anti-competitive."
The deal will make ICE more competitive in terms of licensed index products. "It is a licensing model. The CME has the S&P (and Dow Jones Indexes); ICE has the Russell and NYSE Liffe has the MSCI licensing. So now, for any MSCI or Russell products, you’ll be trading [on an] ICE-NYSE entity."
KBW’s preliminary analysis on accretion dilution suggests the deal could be more than $1 accretive to their 2014 estimate of $9.68 for ICE’s earnings per share (EPS). “We estimate that another $50 million of cost savings could be an additional 3% accretive. If we assume $3 billion cash consideration, ($2 billion debt funding), then at the $33 price, this could be more than 10%-13% accretive to ICE standalone by 2014.”
About the Author
Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures magazine in 2001, before the name change to Modern Trader, and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.