S&P Wary of NYSE-ICE Merger - Analyst Blog
28 Dicembre 2012 - 5:10PM
Zacks
Immediately after the announcement of the $8.2 billion
acquisition of NYSE Euronext Inc. (NYX) by
IntercontinentalExchange Inc. (ICE) last week,
Standard & Poor's Ratings Services (S&P) has cast a
concerned outlook on the merger, which is expected to culminate by
the first half of 2013, subject to the fulfillment of regulatory
compliances in the U.S. and Europe. The ratings agency is skeptical
about the raised debt amid weak fundamentals.
Accordingly, S&P assigned an issuer credit rating of
“A+/A-1” on NYSE. The company has also been kept under the
CreditWatch with negative implications. A CreditWatch acts as a red
flag and allows a company to monitor its actions before causing a
detrimental effect on ratings.
S&P’s concern hovers around NYSE’s inflated debt position,
which the company plans to carry in the merged company as well.
Higher debt and lower working capital in the first half of 2012
also impelled the ratings agency to downgrade NYSE’s outlook to
negative from stable, in August 2012.
Further, with a long-term debt of $2.5 billion at the end of the
first nine months of 2012, NYSE bears the brunt of higher borrowing
costs, which further constricted the operating margins to about 33%
during the same period from 9% in the year-ago period. At present,
higher debt and capital expenditure has led NYSE’s debt-to-EBITDA
ratio to deteriorate to 2.4x at the end of September 2012 from 1.6x
at 2011-end, which again underscores ample financial and operating
risks.
The rating agency is wary of NYSE’s liquid assets, which may
hardly cover the operating expenses for three months. At such a
juncture when heavy capital expenditure is expected until at least
mid-2013, consistent dividends and share buybacks amidst declining
operating margins and operating cash flow only augment business
risks. Hence, S&P does not expect any rating upgrades over the
next two years.
The financial risks from the higher debt obligations do not make
this potentially strong merger any less risky. This is due to
the fact that IntercontinentalExchange plans to squeeze all of its
cash of $1.0 billion and raise another $1.8 billion from its
revolving credit facility. This leaves the combined entity with a
debt burden of about $4.7 billion and debt-to-EBITDA ratio of 2.2x,
according to the S&P, which remains in a perilous state.
Nevertheless, the ratings agency is optimistic about ICE Clear
Europe providing clearing services to NYSE Liffe, as part of the
merger. This clearing pact allows NYSE to diminish the cost and
risk of building its own clearinghouse in London and mutually
benefit from the diverse product portfolio. Moreover, S&P
believes that NYSE is making efforts to reduce its debt obligations
through refinance and other activities. Even post merger, the joint
entity has the potential to improve its operating cash flow and
produce cost synergies worth about $300 million by 2014.
However, these actions would take quite a long time given the
company’s capital and other extraordinary cost requirements of
about $150 million in 2013. Hence, a risky financial and operating
leverage could also shake investor confidence, and call for an
appropriate check and control system instantaneously.
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, while the long-term
recommendation remains Underperform.
INTERCONTINENTL (ICE): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Grafico Azioni NYSE Group (NYSE:NYX)
Storico
Da Giu 2024 a Lug 2024
Grafico Azioni NYSE Group (NYSE:NYX)
Storico
Da Lug 2023 a Lug 2024