By Tim Cave, Tom Osborn and Michelle Price
Of FINANCIAL NEWS
IntercontinentalExchange (ICE) has announced it has agreed to
acquire the iconic U.S. bourse NYSE Euronext (NYX), in a deal that
would create one of the largest global exchange groups.
The Atlanta-based ICE, which is best known as a commodities
marketplace, announced a cash-and-stock-deal before the U.S. market
open today which valued NYSE Euronext at $33.12 a share, or $8.2
billion.
In a statement, ICE said the merger would create "a premier
global exchange" covering markets across "agricultural and energy
commodities, credit derivatives, equities and equity derivatives,
foreign exchange and interest rates." The deal is expected to close
in the second half 2013, subject to regulatory approvals in Europe
and the US and approval by shareholders of both companies.
The deal mirrors ICE's joint $11.3 billion counterbid with
Nasdaq OMX (NDAQ) last year to purchase NYSE Euronext, in an
attempt to scupper NYSE's deal with German operator Deutsche Boerse
(DB1.XE). ICE would have acquired its rival's derivatives assets as
part of the deal, including Liffe, while Nasdaq would have taken on
NYSE Euronext's equities business. However, the deal was scrapped
on competition grounds following discussions with the antitrust
division of the U.S. Department of Justice.
Here we ask 10 key questions raised by the merger.
1. Why is ICE buying NYSE Euronext?
It's the derivatives, stupid. ICE chairman and chief executive
Jeff Sprecher has long coveted a major European financial futures
business to complement ICE's highly profitable energy franchise,
ICE Futures Europe. Liffe, NYSE's London-based futures franchise,
dominates trading in commodities and short-dated European interest
rates. Peter Lenardos, an analyst with RBC Capital Markets, said a
combined entirety would also be able to compete more effectively
with futures behemoth CME Group in both trading and clearing of OTC
products. ICE said today that it is "committed to maintaining the
position of NYSE Liffe in London as a leading international market
operator for derivatives products."
2. What is in it for NYSE?
The advantages for NYSE from a derivatives and clearing point of
view are potentially huge: ICE has a ready-made derivatives
clearinghouse in London, with support from major dealers and
clearing brokers - many of whom are shareholders in ICE. The
combined entity would dominate European energy, commodity and
short-dated fixed income trading, as well as OTC credit clearing.
Distribution of its fledgling NYSE Liffe U.S. business, including
its growing fixed income franchise, would increase markedly with
ICE's backing.
3. Where does clearing fit into the deal?
Clearing has become central to both exchange's strategies amid
new U.S. and European regulations which will force standardized
over-the-counter derivatives through clearing houses. ICE Clear
Europe is a well-established European listed futures clearing
franchise which is also dominant in the OTC credit default swap
market with plans to expand into foreign exchange and OTC energy.
NYSE, meanwhile, is building a new London-based clearing offering
for listed and OTC derivatives in a bid to capitalise upon
opportunities created by the new rules.
The deal with ICE is a nice post-trade fit which will see NYSE
drop the project - which is due to cost around $85 million - and
migrate its clearing into ICE Clear Europe. This arrangement would
likely be attractive to NYSE's clients, many of whom are already
members of ICE Clear and are already invested in its default
fund.
4. What is the future of NYSE's equities and listings
businesses?
ICE said today that it is committed to preserving the NYSE
Euronext brand and that it plans to maintain dual headquarters in
Atlanta and New York, which suggests the Big Board and US equities
trading are safe.
Europe, however, is another matter. The exchanges said that they
would explore spinning off NYSE's Euronext markets of Paris,
Amsterdam, Brussels and Lisbon into a separate listed entity, "if
market conditions and European policy makers support the offering."
This suggests the future of the European equities business remains
uncertain and other players may yet enter into the mix.
Nasdaq OMX has long-struggled to develop a pan-European
franchise, which would make the Euronext markets an attractive
complement to its Nordic and Baltic equities offering. The other
major contender for the European equities business would be
Deutsche Boerse, whose own franchise is focused almost exclusively
on German stocks. The German exchange group has aspirations to
expand its existing cash equities offering and grab some of the
retail market. Snapping up the Euronext markets would achieve this
nicely.
5. And what about the future of NYSE's IT and technology
business?
Technology was conspicuously absent from today's
announcement.
NYSE's IT and technology franchise is the smallest of the
group's three divisions, but one which it has had grand ambitions
for. Earlier this year, NYSE chief executive Duncan Niederauer said
the exchange aimed to more than double the revenues it generates
from technology sales, to reach $1 billion by 2015, and had
targeted double-digit revenue growth this year. However, the
division has failed to deliver this year and those targets have
already been revised down, according to analysts. In the first nine
months of this year, NYSE's revenues from IT were down 3% to $353
million, according to its financial reports.
It is unclear how the division would fit within the ICE group,
since Sprecher has built up the exchange based a strong suite of
proprietary technology products, including internet-based
platforms.
6. Would the deal get regulatory approval?
The companies said today the deal is expected to close in the
second half, subject to regulatory approvals. Since ICE has no
existing interest in US cash trading and the combined group's
futures market operations would have a combined market share of
10%, the Department of Justice approval would be very unlikely to
oppose the deal.
The scrutiny this time round will become much more from European
competition authorities, principally DG Markt and the UK's Office
of Fair Trading. Critics may argue that the deal could have serious
implications for start-ups looking to compete in derivatives
trading or clearing, but the European derivatives businesses of ICE
and Liffe do not compete. Lenardos said: "We do not foresee
anti-trust risk as there is no significant business overlap."
7. Is ICE paying the right price?
The transaction is currently valued at $33.12 per NYSE Euronext
share, or a total of approximately $8.2 billion, based on the
closing price of ICE's stock on December yesterday. At an implied
value of 13-times earnings - and a 37.7% premium to NYSE's closing
price yesterday - the deal looks expensive, according to RBC's
Lenardos before the deal was announced. "$10 billion is a steep
price for ICE to gain meaningful access to European derivatives,"
he wrote. But Alex Kramm, an analyst at UBS, also commenting before
the deal was announced, said it still had the potential to be
"strongly accretive" for ICE's earnings, in particular from
derivatives trading and clearing revenues. The companies said today
run-rate expense synergies of $450 million are expected to be
achieved in the second full year post-closing.
8. What is the likelihood of counterbids?
As displayed during the wave of mega exchange mergers last year,
a big deal often prompts an aggressive wave of counter-bids by
rivals keen not to miss the party. In addition to the joint
ICE-Nasdaq bid for NYSE Euronext, the London Stock Exchange was
ultimately thwarted in its bid to buy Canadian counterpart TMX
Group by a group of local institutions called the Maple Group. In
the instance of this deal, the only major U.S. and European
exchanges with the firepower to put in rival bids are likely to be
CME Group and Deutsche Boerse. However, the German giant's bid to
acquire NYSE Euronext has already faltered once before, based on
competition concerns in the European listed derivatives market.
Meanwhile, according to Richard Perrott, "CME is focusing on
organic growth, and probably would not be interested in NYSE
Euronext's non-derivatives businesses. It is difficult to see
anyone else looking to outbid ICE."
9. What does it mean for the rest of the market?
The bourses' claim that a combined entity will create an
"unparalleled" operator of global exchanges and, crucially,
clearinghouses is not a hollow boast.
Regulations coming into force over the next two years will put
tens of trillions worth of derivatives through clearinghouses.
Those who can clear OTC derivatives alongside listed products are
expected to be the biggest winners. That puts ICE squarely on a
collision course with US behemoth CME Group, which controls 90% of
the US futures market, and is already a major OTC clearer. The new
group will be much better able to compete with the CME Group,
according to analysts.
In Europe, ICE already competes with Deutsche Boerse's Eurex
Clearing in credit derivatives clearing. The possible future
addition of an OTC rates clearing business in time to complement
Liffe's rate futures franchise could bring it into competition with
both Eurex Clearing and LCH.Clearnet. Offering Liffe a ready-made
clearing house could also rejuvenate its franchise and give it
greater control over product development, at a time when up-start
rivals are looking to build products that compete with its core
rate futures.
The CME declined to comment on the implications of the deal.
10. What happens to the executives?
Sprecher's power base will remain absolute as chairman and chief
executive of the combined group. Niederauer will be president of
the group, and chief executive of the NYSE division.
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Financial News understands that no decision has been made with
regard to headcount in Europe. NYSE has already seen a number of
senior executives depart this year, including global head of
derivatives Garry Jones.
Website:
http://www.efinancialnews.com/story/2012-12-20/ten-questions-raised-by-ice-nyse-merger-talks
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