SMX Acquisition Provides Growth Opportunity For IntercontinentalExchange

Atlanta-based exchange operator IntercontinentalExchange Group (NYSE:ICE) announced an agreement to buy the Singapore Mercantile Exchange (SMX) for $150 million in an all-cash transaction last quarter. ^[1] The company completed the acquisition earlier this month, and SMX should start contributing meaningfully to ICE’s results next quarter. SMX has a diverse portfolio of contracts and futures for agriculture commodities, energy, currencies, metals and commodity indices for the Asian market. The acquisition reinforces ICE’s derivatives division, which includes contracts in the U.S. and European markets, and contributes about 60% to our $241 price estimate for ICE’s stock, mainly driven by growing trading volumes in this high-margin segment.

The SMX acquisition is in keeping with the trend of ICE driving  growth through acquisitions, as it has acquired exchanges such as the International Petroleum Exchange, the New York Board of Trade, the Winnipeg Commodity Exchange, the European Climate Exchange and NYSE Euronext at regular intervals over the last decade. Over the last few years, a similar trend has been observed across the industry, with major exchange operators consolidating across geographies. A major advantage for exchange operators (including ICE) expanding into Asia is that these markets are seeing trading volumes grow rapidly, especially in the absence of stringent regulatory restrictions like in the U.S. and Europe. ^{[2] [3]}

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What The Acquisition Means For ICE In The Long Term

The Singapore Mercantile Exchange has retained licenses to operate both as an approved exchange and a designated clearing house. The acquisition therefore provides ICE with exchange and clearing infrastructure for the first time in Asia. Although the company had some presence in Asia over the last decade, with Singapore as its base for derivatives trading, SMX provides it with a much larger customer base in the region. ICE’s strongest trading areas have traditionally been energy and agriculture contracts, for which there is currently no independent market in Asia. ^[4] Acquiring SMX gives ICE an opportunity to create an exchange in Asian markets in one of its areas of core expertise. The focus on derivatives is a good move for the company given that profits have been declining in the equity trading division, especially in the U.S.

Asia has also been the target of competing exchange operators such as Hong Kong Exchanges and Securities and Deutsche Börse Group. Hong Kong Exchanges (HKEx) bought the London Metal Exchange (LME) for $2.2 billion in 2012, reportedly outbidding CME Group (NASDAQ:CME) and ICE at the time. This move has helped it capitalize on the opportunity provided by Yuan-denominated trading of metals in China. ^[5] Since Hong Kong is the largest offshore trading venue of Yuan-denominated products, HKEx’s intention to use the LME to target the Chinese market made sense. ^[6]

In response to HKEx’s Asian expansion, Deutsche Börse has also expanded its operations in Asia with the  launch of a new clearing house in Singapore. ^[7] More recently, it also reached an agreement with Indonesia Commodities and Exchange to develop a trading platform for the Indonesian market. ^[8] Before this announcement, Deutsche Börse-owned Eurex granted access to its European platform to market players in Asia via partnerships with local exchanges, since it had no infrastructure in Asia. With a clearing house in Singapore and a trading platform in Indonesia, Deutsche Börse is now looking to tap the strong growth potential in Asia.

Going forward, ICE is shifting SMX’s existing technology to ICE’s trading and clearing platform. This transition should be complete by the end of the quarter. While industry estimates imply that $150 million may have been a steep price for the exchange, we expect it to have a long-term benefit for ICE, mainly because the company automatically gets the ability to operate in Asia (which could have been a struggle had it started from scratch).

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1. ICE to Acquire Singapore Mercantile Exchange, Intercontinental Exchange Group Press Release, November 2013 [↩]
2. Obligations Under European Market Infrastructure Regulation Imminent, Morgan Lewis, June 2013 [↩]
3. New US Derivative Rules Leave Asia Markets Vulnerable, Malaysian Insider, November 2013 [↩]
4. SMX Purchase Gives ICE Two-Year Asia Advantage Over Rivals, Risk Management News, December 2013 [↩]
5. HKEx Profits Up As LME Brings In Fresh Revenues, South China Morning Post, February 2014 [↩]
6. HKEx Targets China Growth After $2.2 Billion LME Deal, Bloomberg, June 2013 [↩]
7. Deutsche Börse To Set Up Clearing House In Singapore, Wall Street Journal, February 2014 [↩]
8. Deutsche Boerse Extends Asia Reach With Indonesia Agreement, Reuters, February 2014 [↩]