NYSE Euronext’s (NYSE:NYX) stock jumped 20% Wednesday after the markets closed as rumors of a possible takeover of the oldest exchange in the U.S. by IntercontinentalExchange Inc. (ICE), spread across the media.  The Wall Street Journal was the first to report that ICE, an energy and commodities exchange established in 2000, by a consortium of energy companies and banks, was discussing a cash-and-stock transaction to acquire NYSE for about $33 per share. 
ICE had made a hostile bid for NYSE along with Nasdaq (NASDAQ:NDAQ) in April last year, after NYSE had announced plans of a possible merger with Deutsche Boerse AG. The bid was blocked by the U.S. Justice Department as it would give Nasdaq a monopoly over listings in the country. Regulators also rejected the Deutsche Boerse-NYSE merger.
Before the news broke out Wednesday, NYSE had a market cap of $5.8 billion at the close of trading, in line with our evaluation of $25 per share for it. Both companies declined to comment on the deal, but we believe that ICE might have its eyes on NYSE’s derivatives trading platform, Liffe. Particularly, given the revenue opportunity it would create once the much anticipated regulations requiring over-the-counter contracts to be cleared through central clearinghouses come into play. Reuters believes that the regulations will lead to annual revenue opportunities of around $1.2 billion, which is why exchanges like CME Group (NASDAQ:CME) and ICE are scrambling for a slice of the pie.
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Why Is ICE Interested In NYSE?
ICE already owns a clearing house in Europe where NYSE Liffe enjoys a near duopoly in the European market along with Deutsche Boerse, and the merger would open up possible synergies. NYSE has been having a tough year in terms of trade volumes, but saw a massive recovery in the European derivatives business in November. The average daily volume (ADV) improved by 27% over October to match the ADV for 2011.
The Liffe business consists primarily of interest rate futures and equity derivatives, with the former accounting for about 70% of the revenues. The interest rate derivatives business, which is lucrative for institutional clients who use contracts for hedging purposes, might be particularly important to ICE as it would help the exchange compete with CME. ICE had earlier tried to expand its business with a bid for Chicago Board of Trade (CBOT) in 2007, but the exchange merged with CME. ICE’s bid for London Metal Exchange earlier this year, also proved unsuccessful.
If approved, ICE might sell off some of NYSE’s businesses. This might be possible given that the proposed deal last year involved Nasdaq taking over NYSE’s stock exchanges with ICE getting the derivatives business. NYSE has been losing ground in the equity trading market, its market share once stood above 80%, but has dropped to about 20% in the last decade. In its last quarterly earnings report, NYSE reported a 37% decline in U.S. cash products ADV, leading to a 37% decline in revenues.
Taking a look at the revenue breakdown for NYSE, we see that almost two thirds of its $4.5 billion revenues are derived from cash trading and listings, a quarter from derivative trading, and the rest around 10% from information services and technology solutions. EBITDA margin for derivative trading is much higher than cash trading (45% compared to 25%) which means that EBITDA contribution from both streams is more even. Cash trading and listing accounts for half of the company’s EBITDA, whereas derivatives trading accounts for 40%.
Given these figures, it might make sense for ICE to take over the derivatives business, which would complement its own and look for possible buyers to divest the equity trading business. We will keep a close eye on developments and provide an update accordingly.Notes:
- Upstart In Talks To Buy NYSE, The Wall Street Journal, 19th December, 2012 [↩]
- IntercontinentalExchange Said in Offer Talks With NYSE, Bloomberg Businessweek, 19th December, 2012 [↩]