Deutsche Boerse's $9.53 Billion Deal May Spur More Takeovers

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By Whitney Kisling, Nandini Sukumar and Elizabeth Stanton
(c) 2011 Bloomberg News
Tuesday, February 15, 2011; 1:32 PM

The deal, which gives Deutsche Boerse 60 percent of the combined entity, forms an organization with market share in futures that's similar to Chicago-based CME Group Inc. It would also top CBOE Holdings Inc. of Chicago in U.S. options. Deutsche Boerse's plan follows Singapore Exchange Ltd.'s October bid for ASX Ltd., which runs the Australian stock market, and London Stock Exchange Group Plc's agreement last week to buy Canada's TMX Group Inc.

"I don't think we're done with this consolidation round," said Peter Kovalski, manager of two financial-services mutual funds at Alpine Woods Investments in Purchase, New York, which manages $6 billion. "In order to fend off any new upstart exchanges, the established exchanges have to continue to drive their costs down so that it would be cost-prohibitive to put together the infrastructure needed to form an exchange."

CBOE Holdings and New York-based Nasdaq OMX Group Inc. rallied yesterday amid speculation they may be the next exchange operators to be purchased, said Patrick O'Shaughnessy, an analyst at Raymond James & Associates Inc. in Chicago.

"It's fair to say the speculation is somebody might be wanting to buy either CBOE or Nasdaq," O'Shaughnessy said yesterday. "CBOE and Nasdaq are two of the names constantly thrown around as being potential takeover candidates."

CME said today that "like other industry participants, we will continue to monitor ongoing developments in the global exchange sector and the implications of those developments on our long-term growth strategy."

Deutsche Boerse, which runs the Eurex futures platform and Frankfurt Stock Exchange, is swapping one share of its own stock for one share in the new company, while every NYSE Euronext share will be converted into 0.47 share, according to a statement today. Reto Francioni, the chief executive officer of Frankfurt-based Deutsche Boerse, will serve as chairman. Duncan Niederauer, CEO of New York-based NYSE Euronext, will keep that title at the combined organization.

While the merged entity will list corporations with about $15 trillion in value, more than any other exchange, what may prove more lucrative is ownership of growing venues for trading futures and options, said Rich Repetto, a New York-based analyst at Sandler O'Neill & Partners LP. The union

"My brain says it makes sense, but my heart is a little bit disappointed" about the deal, said John Lynch, Charlotte, North Carolina-based chief equity strategist at Wells Fargo Funds Management, which oversees about $465 billion. "Sentimentality aside, it's the right thing to do if the merger can reward shareholders with improved exposure to the options and derivatives market internationally."

Deutsche Boerse will get 10 of 17 seats on the combined company's board, according to today's statement. The deal values NYSE Euronext at 8.3 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with 9.35 times Ebitda for TMX and 18.45 for ASX, the data show.

About 37 percent of revenue at the joined company will come from derivatives trading and clearing, making it the largest unit based on 2010 revenue, according to today's statement. Cash listings along with trading and clearing accounted for 29 percent, settlement and custody made up 20 percent, and market data and technology services was 14 percent, the statement said.

NYSE Euronext fell 3.1 percent to $38.21 at 1:06 p.m. in New York and lost 6.8 percent earlier, the most intraday since May 6, 2010. Deutsche Boerse slipped 2.4 percent to 59.85 euros. The new company will list shares in New York, Frankfurt and Paris and be organized as a Dutch holding company.

While the joined company's name hasn't been picked, proposals should be ready for consideration by the companies' boards in the next month or two, Niederauer said at a press conference in New York today.


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