New York: In October, Jeff Sprecher, chief executive of upstart IntercontinentalExchange, approached NYSE Euronext CEO Duncan Niederauer with a modest proposal to team up on clearing trades in London. As the men continued talking, Sprecher grew bolder, instead suggesting that ICE buy NYSE in what became an $8.2 billion deal announced on Thursday.
The deal will link up two powerful derivatives exchange and clearing house operators, but threatens to further reduce the clout of the New York Stock Exchange. While the New York Stock Exchange has stood for 200 years as an iconic symbol of US capitalism, it is almost an afterthought in this deal.
For ICE, the crown jewel of NYSE Euronext is Liffe, Europe's second-largest derivatives market, analysts said. Niederauer had long felt that NYSE's shareholders did not appreciate the true value of the London-based futures and options exchange, and had talked to bankers about how to improve NYSE's stock price, a person familiar with the matter said.
Liffe will help ICE compete against US-based CME Group, owner of the Chicago Board of Trade. Derivatives trading remains highly profitable for the exchanges, and new rules next year will dramatically expand the demand for clearing over-the-counter contracts.
The stock market businesses are less valuable to ICE. The company said it will try to spin off the Euronext European stock market businesses in a public offering, generating speculation it may also have little interest in the NYSE trading floor. Profits from stock trading have been significantly eroded by new technology and the rise of other places for investors to trade, including venues known as "dark pools".
ICE's Sprecher will be CEO of the combined organisation, and the NYSE Euronext CEO will be president, a ceremonial title at many US companies. In an interview, Niederauer said he would remain at least through 2014 as an "important senior member" of Sprecher's management team. Niederauer will also be CEO of the NYSE Group. The combined company will be based in New York and Atlanta, where ICE is headqurtered.
Sprecher and Niederauerhave been friends for years, but the two stopped talking for about six weeks in 2011 when ICE teamed up with Nasdaq OMX Group to make an unsolicited bid for NYSE Euronext. That bid came even as the New York Stock Exchange operator was trying to sell itself to Deutsche Bourse (DB1Gn.DE). Regulatory concerns killed both deals.
Without the Nasdaq or Deutsche Bourse's huge equity operations, ICE alone has far less overlapping business and should face easy approvals, antitrust lawyers said. The deal values each NYSE Euronext share at $33.12, a 28 per cent premium to the stock's closing price on Wednesday. NYSE Euronext stock rose 34 per cent to end at $32.25 on Thursday. ICE's shares fell as much as 4 per cent but finished regular trading at $127.60, up 1.4 per cent on the day.
ICE said it would pay annual dividends of $300 million to the companies' shareholders once the deal closes, about what NYSE pays its shareholders now.
In the doldrums
The deal reflected Niederauer's inability to get his company's share price out of the doldrums. Before the latest ICE offer emerged, NYSE Euronext's shares had fallen by nearly a third since ICE and Nasdaq launched their thwarted joint bid. Further consolidation of exchanges was "inevitable" and ICE was a "great partner," Niederauer said on a call with analysts, so continuing on alone did not make sense.
"We can sit here and keep slugging away and keep working hard, but the bottom line is we had not delivered, in my mind, sufficient returns to shareholders," Niederauer said. NYSE bought Euronext, including Liffe, for 8 billion euros in 2007. Sprecher incorporated the stalled stock price - and the unrecognized value of Liffe - as part of his pitch.
"The reason that we were prepared to pay $33 a share for a company that was trading at $24 a share was that there is a $33 company in here and the market was just not either seeing it or willing to give credit for," he said in an interview. "We said, 'let's just force the credit.'"
The two sides negotiated in secret for about eight to 10 weeks, the two CEOs said. In options markets, there were some signs that word might have leaked out, with a sudden upswing in the demand for call options on NYSE, which perform well when a company's share price rises.
ICE started out as an online marketplace for energy trading before Sprecher initiated a string of acquisitions from the London-based International Petroleum Exchange in 2001, to the New York Board of Trade and, most recently, a handful of smaller deals, including a climate exchange and a stake in a Brazilian clearing house.
ICE's current main operations are in energy futures trading and, it has steered clear of stocks and stock-options trading, key businesses for NYSE Euronext. "This deal is probably not going to generate a lot of concern from an antitrust perspective," said Warren Rosborough, a veteran of the US Justice Department's antitrust division who is now with the law firm McDermott Will & Emery.
In clearing, ICE has a popular US over-the-counter and listed business, while Liffe's operation is strong in futures and based in Europe. Concerns over a small amount of competing derivatives business could be addressed with straightforward divestitures, Rosborough said. "It's an open question about whether it will generate questions," he added. "If there is a fix, it will be relatively easy fix."
Sprecher said the deal had been "well received" by regulators after he and Niederauer completed a "whirlwind tour" in the United States and Europe ahead of Thursday's announcement. Officials at the European Commission, the Department of Justice and Securities and Exchange Commission declined to comment. Last year, Justice Department objections blocked ICE and Nasdaq OMX's $11 billion bid on concerns the tie-up would dominate US stock listings. The rival $9.3 billion bid by Deutsche Boerse fell afoul of European regulators.
A combined ICE-NYSE Euronext would leap-frog Deutsche Boerse (DB1Gn.DE) to become the world's third-largest exchange group with a combined market value of $15.2 billion. CME Group has a market value of $17.5 billion, Thomson Reuters data shows. Hong Kong Exchanges and Clearing (0388.HK) is the world's largest exchange group with a market cap of $19.5 billion.
ICE said it expected to achieve $450 million in cost savings from the takeover. In the first year after the deal closes, additional earnings of 15 percent are expected. Long-time Wall Street traders saw the potential takeover of the venerable stock exchange by a 12-year-old derivatives upstart as fraught with symbolism.
"It's the end of an era," said a director on the board of a rival exchange who did not have clearance to speak to the press and asked not to be named. "I think ultimately the floor will be closed, because Jeff (Sprecher) has shut every floor he's ever had," the person said.
With the deal still a long way from completed, Sprecher and Niederauer said they planned to keep the high-profile NYSE trading floor running. "The floor has value and in particular, it has a lot of brand value," Niederauer said. "So we are committed. Jeff is committed." The exchange was prepared to shut down the floor temporarily during superstorm Sandy and trade completely electronically, Wall Street executives said.
Shareholders will have the option of accepting $33.12 in cash per NYSE Euronext share or 0.2581 ICE share or a mix of $11.27 in cash and 0.1703 ICE share, subject to a maximum cash consideration of $2.7 billion. Morgan Stanley was the lead financial adviser to ICE, with assistance from BMO Capital Markets Corp, Broadhaven Capital Partners, JPMorgan Chase & Co, Lazard Group LLC, Societe Generale Corporate & Investment Banking, and Wells Fargo Securities LLC. ICE legal advisers are Sullivan & Cromwell LLP and Shearman & Sterling LLP.
The main financial advisers to NYSE Euronext are Perella Weinberg Partners and BNP Paribas. Further financial advice to NYSE Euronext was provided by Blackstone Advisory Partners, Citigroup, Goldman Sachs & Co and Moelis & Co Legal advisers to NYSE Euronext are Wachtell, Lipton, Rosen & Katz, Slaughter & May, and Stibbe NV.