“There certainly is need for more consolidation from the perspective of the exchanges to remain competitive,” Lee said in a phone interview. Nasdaq OMX may be attractive as a potential target because it’s “a fully grown, integrated exchange with presence across different asset classes.”
Among 11 exchange owners worldwide with market values exceeding $5 billion, the median price-earnings ratio is about 22, data compiled by Bloomberg show. Nasdaq OMX is at 13.5, the lowest in the group. When Atlanta-based ICE agreed to purchase New York-based NYSE Euronext in December, the target company’s multiple jumped from less than 12 to the current level of 20.8. ICE fetches 22.7.
Nasdaq OMX is a “very undervalued, very attractive company,” Vulcan Value’s Fitzpatrick said. “There’s nothing there that’s not to like. It could be someone in the industry, it could be another exchange, it could be a financial buyer.”
One rival that could try to buy Nasdaq OMX is Deutsche Boerse AG, said Thomas Caldwell, the chairman of Toronto-based Caldwell Securities Ltd. European regulators barred Frankfurt- based Deutsche Boerse from buying NYSE Euronext in 2012, citing the dominance over the region’s derivatives trading that the combined entity would have had.
Deutsche Boerse CEO Reto Francioni said at a conference last month that more exchange consolidation was inevitable, though he added that regulators remain an obstacle. NYSE Euronext agreed to sell to ICE after U.S. regulatory changes prompted stock trading to fragment over 13 American exchanges and dozens of alternative platforms, crimping industry profits. ICE specializes in commodities futures.
“With the exchanges, it’s no secret everyone’s looking for a partner,” John Feng, a Stamford, Connecticut-based managing director at Greenwich Associates, said in a phone interview. “Ultimately, exchanges are a scale-driven business.”
History shows nationalism could impede Nasdaq OMX’s sale prospects. When NYSE Euronext and Deutsche Boerse announced their ultimately unsuccessful union, U.S. Senator Charles Schumer, a New York Democrat, said his support for the deal was contingent on it being a merger of equals. Singapore Exchange Ltd. dropped its 2010 bid for ASX Ltd., owner of the Australian bourse, after failing to win government support in Australia.
Private-equity suitors could be lured to Nasdaq OMX’s cash generation and low valuation, although their ability to leverage the company might be limited, said Andrew Wellington, the New York-based managing partner and chief investment officer of Lyrical Asset Management.
At 9.8%, Nasdaq OMX’s free cash flow yield is greater than every similar-sized peer and almost twice the group median of about 5.2%, according to data compiled by Bloomberg. The company has about $2 billion in debt. Wellington said Nasdaq OMX should be valued close to $50 a share in a takeover, about 50% more than yesterday’s closing price of $33.24.
“It’s a phenomenal business and generates a ton of cash,” Wellington, whose firm oversees about $624 million including Nasdaq OMX shares, said in a phone interview. “It’s currently underappreciated by the market.”
Today, the shares rose 0.4% to $33.36 at 9:52 a.m. New York time.
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