NYSE Euronext (NYSE:NYX) is expected to announce earnings for the fourth quarter of 2012 on Tuesday, February 5. NYSE had a tough year through most of 2012 as low volatility and uncertain economic conditions led to a decline in trading volumes. But with the company having confirmed a deal with IntercontinentalExchange Inc. (ICE) for the sale of its business, the earnings will have little impact on the stock price. ICE recently stated that it intends to pitch the $8.2 billion acquisition to the European Union’s antitrust regulators and is looking to overcome the hurdles faced by the NYSE-Deutsche Boerse merger last year. The merger was blocked by European authorities over concerns that it would lead to a monopoly in the European derivatives market.
ICE is offering $33.12 per share for NYSE via a cash-plus-stock compensation wherein NYSE shareholders will have the option to either receive $33.12 in cash, 0.2581 share of ICE or a mix of $11.27 in cash plus 0.1703 ICE share. This price is at a premium of nearly 35% to our estimate of $25 per share. Please read our articles: End Of An Era: ICE To Acquire NYSE Euronext and Why Does ICE Want To Takeover NYSE? for more analysis of the deal.
In this note, we will take a look at NYSE’s performance through the first three quarters of 2012 without accounting for the acquisition.
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Cash Volumes Remain Low
Cash trading and listings account for almost two-thirds of NYSE’s revenues and half of the EBITDA. NYSE reported a 37% decline in U.S. cash products average daily volume (ADV) for the first nine months of 2012 due to a market-wide decline and stiff competition from exchanges like BATS (Better Alternate Trading System). Increased trading outside traditional exchanges also had an adverse effect on trading volume. The Trade Reporting Facility (TRF) stated that the share of off-exchange trading increased from 28% of all trades in the U.S. in 2011 to 32% at the end of September 2012.
NYSE recently reported that U.S. cash products ADV for December 2012 was 1.5 billion shares down 15% compared to December 2011 and 3% compared to November 2012. NYSE earns approximately $0.60 per transaction.
Improvement In Derivatives
Although the derivatives trading volume was on a downtrend through most of 2012, there was a recovery in November as the global average daily volume (ADV) for derivatives increased 12% over October. There was a particularly strong recovery in Europe where the derivatives ADV improved by 27% over the October level helped by a strong performance by the LIFFE CONNECT trading platform, which accounted for 2.4 million of the 4 million contracts ADV. The December European derivatives ADV was up 17% from the December 2011 level.
NYSE enjoys a near duopoly in the European market with Deutsche Boerse and its interest rate futures business is believed to be of particular interest to ICE. The company’s position in the market will be challenged by new entrants like Nasdaq (NASDAQ:NDAQ) and CME Group (NASDAQ:CME), both of whom are looking to set up derivatives exchanges in London.