On Thursday morning, the IntercontinentalExchange Inc (NYSE:ICE) announced plans to acquire NYSE Euronext (NYSE:NYX) in an $8 billion deal.
This will give the 12-year-old IntercontinentalExchange Inc (NYSE:ICE) ownership of the New York Stock Exchange, an American icon of capitalism that has remained independent for more than 200 years amid the move to exchange consolidation over the last few years.
After the deal’s close, ICE may sell Euronext, the NYSE’s European stock market business, via an initial public offering, reported Reuters.
In light of the news for the pending merger, research reports came out on Thursday morning. Here’s highlights from a few of them.
Goldman Sachs – Keeps $29 NYX price target But…
Note: After releasing its research report, it become public knowledge that Goldman Sachs Group, Inc. (NYSE:GS) would be advising on the deal.
The Americas Investment Review Committee subsequently determined that the ratings and price target for NYSE Euronext (NYX) should be removed as Goldman Sachs would be acting as a financial advisor to transaction. The “Not Rated” status will remain until sufficient information is available, and/or contingencies appear resolved, to resume analysis.
Earnings estimates during this time period will continue.
Here’s Goldman’s report from this morning.
Background
- News of the possible merger came out from different media outlets including the WSJ and CNBC on Wednesday with ICE (Neutral, $128.31) planning to acquire NYX (CL-Buy).
- CNBC said ICE would pay about $33 per NYSE Euronext (NYSE:NYX) share (about $8.5 bn), a 37% premium to its Wednesday close with payment comprised of one-third cash and two-thirds stock. This would represent ICE’s second attempt to buy a portion of NYX with the first one coming in in April 2011.
- ICE had made an unsolicited offer for NYX’s European derivatives franchise, Liffe, for approximately 20X fwd consensus earnings at the time alongside NDAQ’s attempted acquisition of NYX’s equities and options businesses.
Analysis
The strategic logic of ICE’s prior proposal to acquire NYX’s EU derivatives business included the following:
- Capital would be unlocked by leveraging ICE’s EU clearing infrastructure (one of NYX’s motives for the proposed merger with Deutsche Börse was leveraging clearing assets)
- IntercontinentalExchange Inc (NYSE:ICE) would achieve a foothold in rate futures, diversifying its portfolio away from its core energy complex without compromising the defensibility of the overall franchise
- ICE believed it could drive synergies, uniting Liffe with its European futures business (ICE estimated $200 million savings at the time, driven by ending NYX’s clearing relationship with LCH and eliminating redundant costs).
The press reports did not include a lot of details about the potential NYX/ICE transaction, recall NYX is prosecuting a significant cost initiative to remove $250 million run-rate expenses by end of 2014. We estimate it is tying up $255 million in the build out of its new EU clearinghouse ($85 million project spend through 2013, $170 million incremental regulatory capital).
Implications
We reiterate our CL-Buy on NYSE Euronext (NYSE:NYX). As we indicated in our initiation on October 21, 2012, we believe the current market valuation (10.6X 2013 consensus at 12/19 close) significantly undervalued NYX’s European derivatives franchise.
Our price target of $29 on NYX (based on SOTP) is unchanged and does not include this potential transaction.
Risks
Weak volume environment and low interest rate volatility
RBC – Deal Summary
Here’s highlights from RBC’s summary of the proposed deal.
- The transaction is currently valued at $33.12 per NYSE Euronext share or an approximate $8.2 billion total, based on the closing price of ICE’s stock on Dec. 19, 2012.
- NYSE Euronext shareholders will have the option to elect to receive consideration per NYSE Euronext share of (i) $33.12 in cash, (ii) 0.2581 Intercontinental Exchange common shares or (iii) a mix of $11.27 in cash plus 0.1703 ICE common shares, subject to a maximum cash consideration of approximately $2.7B and a maximum aggregate number of ICE common shares of approximately 42.5MM.
- The overall mix of the $8.2 billion merger consideration paid by ICE is approximately 67% stock and 33% cash.
- NYSE Euronext shareholders will own approximately 36% of ICE shares post-transaction.
- The cash portion of the transaction will be funded by a combination of cash on hand and existing ICE credit facilities.
- The transaction is expected to close in the second half 2013, subject to U.S. and European regulatory and shareholder (from both companies) approvals.
- The majority of run-rate expense synergies of $450 million are expected to be achieved in the second full year post-closing.
- ICE expects “earnings accretion of greater than 15% is expected in the first year post-closing” and it will explore an initial public offering of Euronext as a Continental European-based entity after the acquisition closes “if market conditions and European policy makers support the offering.”
- Four members of the NYSE Euronext Board of Directors will be added to the ICE Board of Directors for a total of 15 members.
- ICE, upon closing of the transaction, will adopt a dividend policy that will provide for an annual dividend payment of approximately $300 million. This amount represents the aggregate amount of NYSE Euronext’s current annual dividend payment.
In addition, a conference call was held between IntercontinentalExchange Inc (NYSE:ICE) and NYX on Thursday morning. Here’s a link and also one to a story we previously wrote about NYX.
