NYSE Euronext: M&A Interest Only Serving to Boost Valuations

The M&A rumor mill has been in full effect over the past 48 hours (ah, the memories…) over the prospects for a merger between Deutsche Boerse AG and NYSE Euronext (NYX), first reported by German magazine Der Spiegel.

The official response from Deutsche Boerse, thus far, is to deny any progress on a deal, and from what I can tell there’s no way a merger would pass regulatory muster on either end of the pond.

Can NYSE Only Look “Downward?”

The first impeding factor is the fact that with NYX’s current market cap about half that of Deutsche Boerse, NYX would likely have to be the “junior partner” in any merger deal. Given the “brand” of NYSE as the world’s largest single stock exchange, not ending up at the top of the nameplate seems to be an implied deal breaker.

The only way the roles could be switched is through heavy financing on the part of NYX, a feat just short of impossible in this market.

Also, DB has been after just about every large exchange operator out there in the past decade, largely because of pressure being brought to bear by the company's largest shareholders, hedge funds Atticus Capital LLC and Children’s Investment Fund Management LLP. They’d love to be able to get out of their DB positions with some decent liquidity.

Let the Games Begin

As with all good M&A rumors, the most important effect is that the companies involved get their shares re-evaluated in the market. This can only benefit NYX, which is looking more and more like a value stock with a sub-10 P/E and dividend yield over 5.5%. While book value computations are largely subjective with this stock, the boilerplate measure is that NYX is trading for 65% of book.

NYSE’s valuation has been compressed as the company lost over 17 points of equity trading market share in the past year. From my October 31 post following the Q3, earnings release:

What I don’t like is the severe loss in market share for total NYSE-listed stocks, down from 59.5 to 42.5 year-over-year. That’s a big dent from recent democratization of the electronic exchanges.

Merger Intrigue

A potential merger between the two exchange operators would create a global powerhouse, as NYX owns the Euronext and Sweden’s OMX exchange, while DB AG is half owner of Eurex (with SWX Swiss Exchange) and last year, acquired the U.S. derivatives exchange, ISE.

Deutsche Boerse’s derivatives share is now the largest in the world, and regulators would have a field day with the combined footprint of NYX/DB, not to mention the absence of another competitor in the electronic exchange arena. The following table (via Reuters) shows just how much a NYX/DB combo would corner the market for derivatives trading:

Parting Thoughts

Deutsche Boerse has opened higher in Frankfurt trading, while NYX is guiding higher by over 15% in the pre-market session. Regardless of the outcome, this Secular Trends Portfolio holding should be due for some valuation adjustments as the market continues to seek out lower costs and eventual M&A activity.

Disclosure: Author does not hold a position in NYX; shares are held in EpiphanyInvesting Secular Trends Portfolio.

Comments

[G23ROCKS:]

Point of correction: NDAQ, not NYX, owns Sweden's OMX.

2008 Dec 10 08:05 PM