The Merging of Exchange Powerhouses
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a December 20, 2012 announcement, commodities exchange powerhouse IntercontinentalExchange (NYSE: ICE) announced its formal intention to purchase New York Stock Exchange operator NYSE EuroNext (NYSE: NYX) for approximately $8.2 billion. The complicated cash-and-stock deal offer provides current NYSE shareholders with three distinct options. Each option values NYSE EuroNext at about $33.12 per share. Although such a high-profile merger will certainly attract regulatory scrutiny, it appears that this deal has a good chance of closing by the end of the fourth quarter of 2013.
About IntercontinentalExchange and NYSE EuroNext
Atlanta-based IntercontinentalExchange is one of the world's largest commodities exchanges by volume. Unlike that of its CME Group (NASDAQ: CME) rival, ICE's focus lies in the energy sector. The company operates a commodities exchange and clearinghouse as well as an over-the-counter division that facilitates the sale of low-liquidity commodities. It also provides comprehensive risk-management and market-data services for traders and companies that wish to assess the potential profitability of complex energy-related investments. Finally, ICE operates a futures exchange that has proven wildly successful with the advent of global high-speed trading. In 2011, the company earned about $549 million on $1.37 billion in gross revenues.
New York-based NYSE EuroNext is known for its signature Wall Street property. As the operator of the most prestigious stock exchange in the United States, the company enjoys tremendous visibility. NYSE EuroNext also operates the American Stock Exchange in New York and several properties in Europe, including the Amsterdam, Paris, Brussels and Lisbon stock exchanges. Its additional properties include a European derivatives clearinghouse and transaction-settlement service that processes real-time trades across its network. Like ICE, NYSE EuroNext conducts a significant amount of market research and serves as one of North America's largest sources of market data. In 2011, the company earned $431 million on $3.6 billion in gross revenues.
How the Deal Is Structured
The ICE-NYSE EuroNext merger's structure is somewhat novel. Under the terms of the deal, NYSE EuroNext shareholders will be given three options. First, they may opt to exchange their NYSE positions for cash consideration of $33.12 per share. Second, they may elect to receive 2.581 ICE shares for every 10 NYSE EuroNext shares that they own. Alternatively, they may choose to receive a "combination package" that includes cash consideration in the amount of $11.27 as well as 1.703 ICE shares for every 10 NYSE EuroNext shares that they own.
These three options are circumscribed by the limitations that ICE's board of directors has placed on its commitment to the deal. Specifically, the company is unwilling to commit more than $2.7 billion in cash and 42.5 million shares to the deal. Collectively, these limits place a cap of $8.2 billion on the deal's current value. Should ICE's value fall considerably from its current levels, NYSE shareholders who opt to accept the company's shares may see smaller returns from the merger.
As it currently stands, this deal values NYSE EuroNext at approximately $33.12 per share. Relative to the stock's pre-announcement closing price of $24.05, this represents a premium of approximately 37.7 percent. Relative to the stock's recent closing price of $33.65, this represents a discount of about 1.6 percent. However, the deal has been rendered somewhat more attractive by ICE's recent price run-up. Relative to its December 28 closing low of $123.66, its current closing price of $134.82 represents a premium of about 9 percent.
Complications and Competition
Relative to NYSE EuroNext's pre-announcement valuation, this deal offers a solid return for the company's investors. In fact, it may be intentionally designed to price ICE competitors like the CME Group out of the market for NYSE EuroNext. Given their collective bias towards commodities, ICE and CME are natural rivals. Although CME has been attending to some merger-related issues of its own in recent months, it remains a potential bidding rival. However, its high debt ratio and lack of cash reserves put the organization in a position of weakness. It would require at least $6 billion in additional leverage to finance a competitive bid. As such, the emergence of a rival merger offer appears unlikely.
Long-Term Prospects and Outlook
Due to natural fluctuations in the value of ICE's stock, the ultimate value of this deal will not be established until the closing date approaches. Should the company's stock continue to appreciate in value, the "share exchange" option could become more attractive to current NYSE investors.
It should be noted that a deal of this magnitude and visibility necessarily involves regulatory scrutiny. Although the global trading market remains quite diversified and competitive, there is a possibility that this deal could be derailed at the last minute by legal or regulatory issues.
Assuming that the deal takes place in its current form, it will represent a fortuitous marriage between two powerful companies. NYSE will provide ICE with significant leverage in the all-important North American market and provide the already-storied NYSE brand with additional visibility. Over the long term, it may also result in still-theoretical synergies. These include the potential consolidation of trading operations between the New York Stock Exchange and American Stock Exchange. In fact, the possibility of closing both floors and moving to an all-digital exchange framework is not out of the question.
Investors would do well to watch for signs that such plans are approaching fruition. In the meantime, this deal may represent a solid value for enterprising market-timers. Those who believe that ICE's stock has considerable room to appreciate would do well to purchase shares in either company at these levels.
mthiessen has no position in any stocks mentioned. The Motley Fool recommends NYSE Euronext. The Motley Fool owns shares of CME Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!