By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Intercontinental Exchange completes Euronext NV IPO and spin-off

On June 24th, 2014, Intercontinental Exchange Inc. (NYSE:ICE), the leading global network of exchanges and clearing houses, completed spin-off and separation of Euronext N.V., the pan-European exchange group. The separation was enacted through an IPO. Euronext’s ordinary shares are listed under the symbol “ENX” on Euronext Paris, Euronext Amsterdam and Euronext Brussels. A group of European institutional investors, that included BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY), Societe Generale SA (EPA:GLE) (OTCMKTS:SCGLY), and ABN Amro, among others, bought a stake of approximately 33% percent in the company. These investors have agreed to hold their shares for a minimum period of three years, which will help ensure that the exchange will remain under a European control.

Spin-off company profile

Euronext is the primary exchange in the Euro zone with over 1,300 issuers worth €2.6 trillion in market capitalization, an unmatched blue chip franchise consisting of 20+ issuers in the EURO STOXX 50® benchmark and a strong diverse domestic and international client base. Euronext operates regulated and transparent equity and derivatives markets. Its total product offering includes Equities, Exchange Traded Funds, Warrants & Certificates, Bonds, Derivatives, Commodities and Indices. Euronext also leverages its expertise of running markets by providing technology and managed services to third parties. Euronext operates regulated markets, Alternext and the Free Market: in addition it offers EnterNext, which facilitates SMEs’ access to capital markets.

Valuation

Based on a recent share price of €19.6 per share, Euronext N.V. had maket capitalization of €1,372 million and an enterprise value of €1,542 million. In the first six months of 2014, Euronext N.V. generated EBITDA of €110 million, and is currently valued at an EV/EBITDA multiple of x7 (annualized H1 2014 results). Company generated approximately €76 million in free cash flow during H1 2014. This provides a free cash flow yield of 11% (annualized H1 2014 results). On August 7th, Euronext N.V. released its second quarter financial results. Dominique Cerutti, CEO and Chairman of the Managing Board of Euronext N.V. commented that management has confidence that company will reach its target of €60 million of efficiencies (over the next three years) and the team is working on an aggressive plan to accelerate timing. An increase of €60 million in EBITDA would bring the EV/EBITDA valuation multiple to x5.5.

Spin-off insights

Although not a standard spin-off, but a sale through IPO, the separation of Euronext N.V. seems to offer some benefits that usually characterize spin-offs. Mainly, independence from ICE will allow to execute a new strategy, will increase potential for product innovation and diversification, and will allow to make operational improvements. In addition, but not related to separation, the company’s business model is characterized by low capital intensity and strong free cash flow generation ability. The potential for a dividend payment and share repurchases is also in place. Third, Euronext N.V. is a leading European equities and derivatives platform, with established and diversified sources of revenues. We believe that recent IPO of Euronext N.V. warrants additional research and monitoring.