ICE gets better end of joint Nasdaq bid for NYSE

April 5, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The stock market seems to think IntercontinentalExchange is getting the raw end of the NYSE Euronext deal. The derivatives exchange’s shares have fallen some 4 percent since its joint $11.3 billion bid with Nasdaq OMX was announced on Friday, while its partner’s have shot up almost 9 percent. But by most measures, ICE comes out on top.

Sure, ICE gets a smaller share of the synergies. It expects to squeeze out just $200 million compared with $520 million Nasdaq will slash by uniting its U.S. and European exchange businesses with the NYSE’s, after handing some of the savings to customers. And if the dual bid is successful, ICE will no longer be a takeover target, at least for a while. So any premium packed into its stock price will probably melt away — and appears to have started to do so already.

But ICE’s $6.4 billion share of the deal isn’t as much of a stretch. Granted, it will have to dilute its shareholders by some 50 percent and raise $1.7 billion in debt. But Nasdaq’s shareholders are facing a 60 percent dilution and the exchange has to tap its lenders for $2.1 billion and take on $2.3 billion of NYSE debt to boot.

That will burden Nasdaq’s balance sheet with debt of 3.3 times earnings before interest, taxes, depreciation and amortization. That’s twice ICE’s ratio, is more than Nasdaq’s original covenants allowed and cheekily includes the full benefit of all synergies even though they will take three years to materialize. The deal has already encouraged Moody’s to consider cutting Nasdaq’s credit rating.

Moreover, ICE would end up owning the juicier bits. Derivatives are growing more quickly than businesses focused on Western stock markets and thus command a higher price-to-earnings multiple. Long-term holders might not like the short-term pain from financing ICE’s bid. Speculators will miss the takeover premium. But the derivatives exchange still seems to be sitting prettier than its bidding partner.

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