FIRING the next shot in the battle for derivatives trading supremacy, the Intercontinental Exchange (ICE) announced Dec. 20 that it would acquire NYSE Euronext in a stock and cash transaction valued at $8.2 billion.
While CME Group remains the 800 lb. gorilla in the market, the proposed acquisition has analysts pegging ICE as the player to watch moving forward.
Mergers and acquisitions are again en vogue as corporations are flush with cash and looking for growth opportunities (Feedstuffs, Nov. 12). CME has made an art form of buying up exchanges that complement its core businesses over the past decade, acquiring the Chicago Board of Trade (CBOT) in 2007, the New York Mercantile Exchange (NYMEX) in 2008 and the Kansas City Board of Trade (KCBT) earlier this year.
Under the terms of the ICE-NYSE agreement, NYSE Euronext shareholders will own roughly 36% of ICE shares after the transaction, based on a share price for NYSE of $33.12.
ICE chairman and chief executive officer Jeffrey Sprecher is expected to become CEO of the combined firm, with NYSE CEO Duncan Niederauer to be president and retaining the title of CEO of NYSE Group, the subsidiary that will operate the iconic Wall Street trading floor.
At $8.2 billion, the acquisition of NYSE is huge, but it still pales in comparison to the $11 billion CME shelled out for CBOT five years ago (Feedstuffs, July 16, 2007) and $9 billion it paid for NYMEX four years ago (Feedstuffs, Sept. 1, 2008). CME paid $126 million in cash for KCBT, a deal it closed on earlier this month (Feedstuffs, Dec. 10).
Last year, CME posted revenues of $3.3 billion, far outpacing the 2011 revenues of $1.3 billion for Atlanta, Ga.-based ICE. NYSE Euronext is a much bigger fish, with 2011 revenues that topped $4.55 billion.
While NYSE is best known as the parent company of the New York Stock Exchange and controls a major chunk of the U.S. equities market, the combined business should give executives in Chicago, Ill., reason to pause.
CME's operations include agricultural, energy, metal and financial futures.
If regulators approve ICE's acquisition of NYSE, the two firms will compete much more directly, with interest rate futures accounting for as much as 27% of CME's revenues.
Also, NYSE Euronext operates NYSE Liffe in London, England, which offers many of the same contracts in Europe. CME is already working to establish an exchange in London, a project that is expected to bear fruit in 2013, pending necessary regulatory approvals (Feedstuffs, Aug. 27).
Regulatory approvals could be an obstacle for ICE; the European Commission earlier this year blocked a proposed combination of NYSE with Germany's Deutsche Borse AG, declaring that the merger would stifle competition. It is too soon to tell if regulators will share a similar concern over the ICE proposal.
Earlier this year, ICE launched its own grain and oilseed futures contracts, spurring CME to rapidly expand its electronic trading hours (Feedstuffs, May 21). While agricultural futures and options accounted for only 10% of ICE's revenues last year, the competition in interest rates and in the broader European markets has some market observers pegging ICE as the horse to bet on over the next decade.
According to a survey of analysts compiled by Bloomberg, ICE has a better outlook than CME, with a projected 31% revenue growth from 2011 to 2015 versus only 12% for CME.
Earlier this year, the two exchanges sparred over but lost their fight to acquire the London Metal Exchange, which Hong Kong Exchanges & Clearing Ltd. ultimately won for $2.2 billion.
The latest move by ICE could push CME to mount some manner of counterattack, most likely in the form of another acquisition. Targets most often mentioned include NASDAQ OMX and CBOE, operator of the Chicago Board Options Exchange. Shares of both exchange operators strengthened on such speculation following the ICE announcement.
While individual investors and pension funds have already filed at least two lawsuits to torpedo the acquisition, CME is not expected to make a competing bid for NYSE for two reasons: (1) a stiff $750 million termination fee for NYSE if it backs out and (2) a simultaneously announced but separate clearing agreement under which NYSE Liffe will do its clearing through ICE.
CME will remain the largest player in the futures and derivatives markets, but if ICE's Christmas gift to itself comes to fruition, the gorilla will have a definitive rival in the jungle.