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Regulators likely to take long look at markets merger

by Scott Stuart  |  Published December 21, 2012 at 10:28 AM
IntercontinentalExchange Inc.'s $8 billion acquisition of NYSE Euronext is expected to draw an extended antitrust review that will likely push its closing date out to the third quarter of next year.

The terms of the deal call for a mixed consideration of cash and stock that, given a full prorating, amounts to $11.27 cash and 0.1703 of an ICE common share for each share of the NYSE, or about $33.12 on Thursday when NYSE shares traded for $32.07.

That figure produced a spread of $1.05, or 3.2%.

If the exchange merger closes at the end of the third quarter, the spread represents an annualized return of about 4%.

The deal timing will turn on the antitrust review of the combination, which apparently will focus largely on the derivatives clearing business of both ICE and NYSE Euronext.

Bids last year by both ICE with Nasdaq OMX Group Inc. and Deutsche Börse AG for NYSE Euronext ran afoul of regulators in both the U.S. and Europe.

The revised bid by ICE without Nasdaq eliminates some competition concerns, but the deal will certainly receive an extended regulatory review.

The European Union Competition Commission in February blocked the DB deal. The agency found then that the German operator's Eurex and NYSE's Liffe units "operate closed vertical silos linking their exchange to their own clearinghouse" and the merger would have resulted in too great a concentration in that it would prevent a new player from entering the market because of advantages of clearing derivative contracts in a single clearinghouse. Clearing essentially removes counterparty risk through the assumption of trading or derivative contracts.

Following the demise of the Deutsche Börse merger attempt, NYSE said it would ramp up its in-house clearing business.

NYSE chief executive Duncan Niederauer said at that time that NYSE intended to put more money into expanding the clearing business.

"We have a solid clearing footprint in both Europe and the U.S. which we will now build on to improve our existing businesses and to create new service opportunities," he vowed.

For example, NYSE pushed to terminate outsourcing with LCH.Clearnet SA in Paris before the Deutsche Börse deal was announced and resumed that push when the merger was blocked.

Of the $450 million in projected cost savings for the ICE deal, roughly $150 million are expected to come from clearing-related businesses.

The move by NYSE to increase its in-house clearing represents competition in that area of the business that antitrust authorities will have to take a close look at, an antitrust attorney said.

In the meantime, LCH.Clearnet Group Ltd. has made further inroads into the U.S. market and is pursuing a deal to be acquired by the London Stock Exchange Group plc that remains under regulatory review in the U.K.

The ICE-NYSE merger agreement revives a recent consolidation among market operators after two deals for NYSE were canceled due to regulatory concerns and nationalist sentiment.

In March 2011, Maple Group Acquisition Corp., a group of Canadian banks and pension funds, topped the London Stock Exchange's $3.3 billion agreed offer for Toronto's TMX Group Inc. with a $3.9 billion offer. This year, Chicago futures market operator CME Group Inc. acquired the Kansas City Board of Trade for $126 million in cash, and bought out the stake it did not already own in London environmental derivatives trader GreenX Holdings LLC, the parent company of Green Exchange LLC, for an undisclosed sum. CME also paid $14.5 million for precious metal certificates from bankrupt brokerage MF Global Inc.

"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," ICE chief executive and chairman Jeffrey Sprecher said in a statement. Sprecher is expected to remain in his role after the merger is completed.

-- Demitri Diakantonis contributed to his report.

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Tags: CME Group Inc. | Deutsche Börse AG | IntercontinentalExchange Inc. | LCH.Clearnet Group Ltd. | London Stock Exchange Group plc | Nasdaq OMX Group Inc. | NYSE Euronext | TMX Group Inc.

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Scott Stuart

Senior Writer: Arbitrage



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