A bid for NYSE Euronext by US futures bourse IntercontinentalExchange (ICE) would create a new powerhouse in European derivatives trading that would not raise the same competition concerns as previously attempted mergers, say industry observers.
ICE today announced its intention to buy NYSE Euronext for US$33.12 per share, or US$8.2 billion today, a 37.7% premium over the exchange’s closing share price on 19 December. According to a statement, ICE intends to create a global exchange operator that offers trading services in agricultural and energy commodities, credit derivatives, equities and equity derivatives, foreign exchange and interest rates.
ICE chairman and CEO Jeffrey Sprecher will hold the same position at the new entity with NYSE Euronext CEO Duncan Niederauer named president of the combined company and CEO of NYSE Group. ICE has also stated its intention to explore an IPO of Euronext – the domestic stock exchange group comprising markets in France, Belgium, Holland and Portugal – subject to the necessary regulatory approvals and market conditions. European cash equity trading accounts for around 9% of overall NYSE Euronext revenues, compared to 26% for derivatives trading.
“Our transaction is responsive to the evolution of market infrastructure today and offers a range of growth opportunities, while enhancing competition in US and European markets and broadening our ability to address new markets and offer innovative products and services on a global platform,” said Sprecher. “We believe the combined company will be better positioned to compete and serve customers across a broad range of asset classes by uniting our global brands, expertise and infrastructure. With a track record of growth and returns, clearing and M&A integration, we are well positioned to transform our combined companies into a premier global exchange operator that remains a leader in market evolution.”
An analyst note issued by private German bank Berenberg on the potential merger, said the rationale for the deal lies in European derivatives, and specifically, ICE’s desire to control NYSE’s London-based European derivatives market Liffe.
“ICE wants Liffe – the second-largest European derivatives exchange, and likely >40% of NYSE Euronext profits,” read the note. “Putting ICE and Liffe together would create a major London-based derivatives exchange, specialising in interest rates, commodities and credit.”
Other market participants also noted the potential synergies of the deal and noted the leading positions each market has in their core markets.
“It makes a lot of sense for the credit markets. It combines ICE’s capabilities in the credit default swap market with NYSE Euronext’s capabilities in cash securities,” said Sean Owens, director of fixed income at consultancy Woodbine Associates. “Going forward, liquidity will migrate to trading venues that can offer both products for and underlying credit. In this area, the merger fills existing gaps in each organisation’s product offering quite well.”
Clearing the way
An ICE-NYSE combination would also remove the need for NYSE Euronext to build its own clearing infrastructure – a project that is currently scheduled for completion in June 2013, following the exchange group’s termination of the deal it had with LCH.Clearnet for derivatives clearing services.
ICE’s European clearing arm has already stated its intention to enter into a clearing services agreement with NYSE Liffe
“We are pleased to extend our innovative and proven clearing services through this agreement with NYSE Liffe,” said Paul Swann, president & managing director, ICE Clear Europe. “We will draw upon our experience as we work with NYSE Liffe to provide the regulated risk-management tools that NYSE Liffe’s customers rely on to compete effectively in an evolving regulatory and economic environment.”
The bid will be the second time ICE has made a play for NYSE Euronext is little over 20 months. In April 2011, ICE partnered with Nasdaq OMX to bid for NYSE Euronext, offering a counterproposal to an offer made by Deutsche Börse that had already been accepted by shareholders.
However, the Nasdaq-ICE bid failed due to the monopoly it would have created in US equity listings, while the European Commission’s competition unit thwarted the Deutsche Börse bid because of the dominant market it would have created in European listed derivatives trading.
Given the limited scope of overlap in terms of business lines, industry observers have suggested competition concerns in this instance would be limited.
“Although antitrust reactions are hard to predict, we suspect regulators on both sides of the Atlantic may be favorably disposed to the transaction, given a desire to promote competition against the Goliaths (CME in the US, Deutsche Börse in the EU),” read a note from AllianceBerstein senior analyst Brad Hintz.