NYSE deal about everything but stocks
The proposed sale will face antitrust hurdles, as regulators have blocked previous exchange mergers.
IntercontinentalExchange (ICE) has offered to buy NYSE Euronext (NYX) for $33.12 a share, in a deal that values the exchange operator at $8.2 billion and reflects a 37% premium to the Wednesday closing price.
The deal may test whether antitrust regulators allow for the consolidation of financial exchanges after blocking ICE's previous bid for NYSE Euronext, and a proposed merger with Deutsche Boerse of Germany earlier in 2012.
There had been speculation an acquirer of NYSE Euronext would have zero interest in NYSE's U.S. stock exchange business amid unrelenting market share losses. But while the deal's structure appears bullish on U.S. equity markets, in the long run, the prospective merger still may have little to do with NYSE's iconic big board and its equity exchange that traces back to 1792.
In a statement released on Thursday morning, ICE said the deal will be financed with a mix of roughly 67% stock and 33% cash. That is contrary to previous reports that a merger would be mostly debt financed.
As part of the deal, ICE said it would explore the possibility of listing Euronext on European markets, if regulators were to support the proposed transaction. (NYSE merged with Euronext in 2006).
"ICE is committed to preserving the NYSE Euronext brand," the statement said. "ICE will maintain dual headquarters in Atlanta and New York. New York headquarters will be located in the Wall Street building, home to the iconic trading floor. ICE will also open a new midtown Manhattan office in June 2013."
On a conference call with analysts, ICE management said Euronext was "massively undervalued," and could benefit from a E.U.-based listing as markets in the region recover from a debt crisis. ICE also said that a tour of global regulators was "very well received," and that the proposed merger would "get a lot of support in the market," referring to antitrust officials.
Meanwhile, NYSE management stressed on the call that the company's combined international stock, derivatives and technology businesses had failed to gain investor confidence, driving the company to Thursday's merger. "We have yet to deliver those returns," NYSE said.
While analysts say the prospect of tie-up is higher than in 2011, when multiple exchange deals were nixed by regulators, their belief going into the announcement of a deal was that ICE may have little interest in NYSE's stock trading businesses.
Instead, analysts said ICE is more interested in acquiring NYSE's Liffe derivatives unit, which is a powerhouse in interest rate futures trading and could complement ICE's specialty in the clearing of highly lucrative swap products like interest rate and credit derivatives.
"The rationale for the deal lies in Europe," wrote Berenberg Bank analyst Richard Perrott in a note to clients before the terms were announced, highlighting ICE's interest in Liffe -- the driver of over 40% of NYSE Euronext's profit.
"Putting ICE and Liffe together would create a major London-based derivatives exchange, specializing in interest rates, commodities and credit. Liffe would shift to using ICE's existing clearing services, removing the need for NYSE Euronext to pursue its own [central counterparty clearing house] build-out," wrote Perrott.
While NYSE has some U.S.-based interest rate swap clearing businesses, they suffer from a lack of access to a central clearinghouse now mandated by Dodd Frank Act reforms and would benefit from London-based ICE's strength in European fixed-income derivative trading and clearing.
Ultimately, ICE's position in swap clearing could benefit from NYSE's futures clearing platform and vice versa, while also diversifying combined operations regionally without much overlap.
NYSE Euronext shares surged over 36% to $32.63 in early Thursday trading, while ICE shares gained slightly to $129, erasing pre-market stock gains in excess of 5%.
ICE said it would explore a Euronext listing; however, earlier reports of the proposed transaction had some analysts handicapping whether ICE could sell NYSE's stock exchange operations.
Even though the reported combination has few overlaps that could draw antitrust issue, Stifel Nicolaus analyst Matthew Heinz wrote, "[We] do believe NYX's cash and options business will ultimately wind up in the hands of another suitor (e.g. BATS, Direct Edge, TMX, LSE), any owner other than Nasdaq would likely avoid the DOJ's ire on listings, which effectively served as the nail-in-the-coffin," for the joint bid last year. His comments were also published before terms of the deal were released.
The "ultimate success or failure of this (potential) transaction will indeed hinge on the appetite for NYSE's cash equity and options businesses," added Heinz, who noted both BATS Global Markets and DirectEdge have stated an interest in becoming publicly traded companies, and could realize such a goal through an acquisition of NYSE's equities business.
A prospective deal "could present an opportunity for either exchange to take itself public via a tax efficient, Reverse Morris Trust (RMT) transaction," the analyst wrote.
In its statement announcing the deal, ICE forecast $450 million in second-year synergies and noted "ICE clearing will be more capital efficient and provide operational efficiencies for clearing members."
ICE's Jeffrey C. Sprecher will continue as Chairman and CEO of the combined company, while NYSE Euronext head Duncan L. Niederauer will be president of the combined company and CEO of NYSE Group. NYSE Euronext will also see four of its board members join ICE's board, which will be expanded to 15 members.
"Our transaction is responsive to the evolution of market infrastructure today and offers a range of growth opportunities, while enhancing competition in US and European markets and broadening our ability to address new markets and offer innovative products and services on a global platform," Sprecher said in a statement.
"The Board of NYSE Euronext carefully considered a range of strategic alternatives and concluded that ICE is the ideal partner for NYSE Euronext in an evolving market landscape," Jan-Michiel Hessels, NYSE Euronext chairman, added in a statement.
The prospective merger is expected to close in the second half 2013, and is subject to shareholder approval and regulatory reviews in Europe and the U.S.
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