Yesterday, IntercontinentalExchange Inc. (ICE)
announced its intention to buy the largest stock exchange based on
listings – NYSE Euronext Inc. (NYX) for $8.2
billion. The deal is expected to culminate by the first half of
2012, subject to the fulfillment of regulatory compliances in the
U.S. and Europe.
Accordingly, the $8.2 billion deal is based on $33.12 per NYSE
share, which represents a 37.7% premium on NYSE’s closing price on
Dec. 19. Meanwhile, IntercontinentalExchange plans to fund the
transaction by letting out 67% in shares and 33% in cash, which
will be raised through cash and credit facilities.
Moreover, the investors at NYSE have the option of taking cash
payment of $33.12 a share or receive 0.2581 shares of
IntercontinentalExchange for each NYSE share. A third option
includes a mix of $11.27 in cash along with 0.1703
IntercontinentalExchange shares per NYSE share, although this
funding is restricted to a maximum cash outlay of $2.7 billion and
a maximum stock outlay of 42.5 million shares of
IntercontinentalExchange.
Post acquisition, the 220-year old NYSE will own 36% in the
12-year old IntercontinentalExchange, while four members of the
former will share the latter’s board. Meanwhile,
IntercontinentalExchange is seeking the advice of Morgan
Stanley (MS) along with JPMorgan Chase &
Co. (JPM), BMO Capital Markets Corp, Broadhaven Capital
Partners, Lazard Group LLC, Societe Generale Corporate &
Investment Banking, and Wells Fargo Securities LLC of Wells
Fargo & Co. (WFC). NYSE, on its part, has appointed
Perella Weinberg Partners, BNP Paribas, Blackstone Advisory
Partners, Citigroup Inc. (C), Goldman
Sachs Group Inc. (GS) and Moelis & Co.
Why the merger makes sense?
NYSE has had a history that elucidates its journey boom to bang.
NYSE has been the largest exchange vis-à-vis value of listing
within the U.S., France and Netherlands. However, the growth of the
company was put under stress with heightened competition,
regulatory challenges and the ongoing market volatility amid the
low interest rate environment over the few years. These factors
have significantly hit the company’s trading volumes and margins,
shrinking its global market share from 82% to 21% currently. A
merger at this point could help NYSE leverage its efficiencies and
global presence productively, thereby positioning it well to tap
growth opportunities once the global economy recoups stability.
Gaining edge through the merger
The NYSE-IntercontinentalExchange merger is expected to be a
solid business combination. The alignment of derivative operations
and clearing services acts as a strategic fit for both the
companies. Alongside, the merger is expected to generate more than
15% of earnings accretion within the first year of completion of
the deal. Going ahead, management projects run-rate expenses
synergies of about $450 million, which will be reaped in the second
year of the merger startup. NYSE itself has generated $82 million
in cost savings so far in 2012 from its expense management plan
that should produce cost synergies worth $250 million, 33% of which
is projected to be earned by the end of 2014.
Additionally, the merger will bring forth a strong competitive
advantage by creating an end-to-end multi-asset portfolio and
diversifying across the globe, while also vigorously tapping new
opportunities in the emerging economies. Further, NYSE Liffe’s both
trading and clearing operations will be merged into ICE Clear
Europe. This will create an excellent clearing model that is
expected to grow by leaps once the interest rate volatility
dissipates and interest rate swap clearing develops. The
operational and capital efficiencies attained in both the U.S. and
Europe will make the merged entity a dominant global player and
well-position it to take away the market share from leading
derivative giant, CME Group Inc. (CME).
Hence, the merger is backed by a strong operating and
competitive leverage, which will help the merged parties to
generate enhanced operating cash flow, trading volumes and expense
control. These factors will further aid IntercontinentalExchange to
initiate annual dividends of about $300 million, which is
impressive given the current volatility, thereby amplifying the
shareholders’ value.
Watchful on Second Attempt
However, this is not the first time that NYSE is up for a
merger. In February this year, NYSE was compelled to terminate its
$10 billion merger with Frankfurt-based Deutsche Boerse due to the
rejection from the regulators based on anti-trust concerns that
were anticipated to create unhealthy competition. For similar
regulatory, political and commercial hurdles, the take-over bid of
$11.3 billion, initiated together by IntercontinentalExchange and
NASDAQ OMX Group Inc. (NDAQ), got scrapped last
year. At that time, IntercontinentalExchange was expected to take
over NYSE’s European futures markets (Liffe, Liffe U.S.) and the
over-the-counter clearing business (NYPC).
Hence, we remain on the edge to see further regulatory and other
developments regarding the merger, as a slight plausibility of the
merger being scrapped based on the anti-trust and regulatory
concerns remains apparent.
IntercontinentalExchange carries a Zacks #3 Rank, which implies
a Hold rating in the short term, while the long-term recommendation
remains Neutral. However, NYSE holds a Zacks #4 Rank, which
translates into a short-term Sell rating, which the long-term
recommendation remains Underperform.
CITIGROUP INC (C): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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