NYSE Euronext Merger Off, Where To From Here?

Includes: CME, ICE, NDAQ, NYX
by: Ry Frank

About one year ago the German stock market Deutsche Boerse and the NYSE Euronext (NYX) agreed to a merger of the two stock exchange companies. The deal valued the NYSE Euronext at $9.5 billion or about $40 per share. The all stock transaction would have left NYSE shareholders owning 40 percent of the world's largest stock and derivative exchanges company. Now approximately one year after the merger was announced, European officials announced they would not approve the merger which would make the new company the dominant player in the European financial markets. Post merger meltdown, investors need to evaluate NYSE Euronext on its own merits.

NYSE Euronext owns the New York Stock Exchange, European stock exchanges in Amsterdam, Brussels, Paris and Lisbon and the LIFFE derivatives exchange in London. The exchanges handle trading for over 8,000 stocks, closed end funds and exchange traded funds. The growth of electronic trading has resulted in the NYSE becoming a technology company, offering trading infrastructure and automated trading systems.

The stocks exchanges - the NYSE and NASDAQ (NDAQ) - are lower profit transaction businesses compared to the futures exchange companies, CME Group (CME) and Intercontinental Exchange (ICE). The result is the futures and derivative exchange companies are more valuable - $18 billion market cap for CME and $9 billion for ICE - than the $7 billion value the market has put on NYSE Euronext. When Deutsche Boerse made its announcement to merge with NYSE Euronext, the NASDAQ and ICE attempted to put together a higher competitive bid for the company. However, at this point it seems a major merger is not in the cards for the NYSE Euronext and investors should re-evaluate NYX as a stand alone investment.

In spite of the merger deal falling apart to start out 2012, NYSE Euronext had a pretty good 2011. Total revenue for the year increased by about 6%. The company was able to increase operating and EBITDA margins by 5% up to the 40% range resulting in close to a 20% gain in net income. Revenue was boosted by significant initial public offering - IPO - activity during the year. The NYX share price is now trading below the $28-and-change level where it was trading in early 2011, prior to the merger announcement. Compared to the last trading day of 2010, the NYX share value is down 6 percent. This is better than the CME return, which is off 15 percent during the time frame. The NASDAQ share price has gained 2 percent and shares of ICE are up 6 percent.

With the recent share price decline following the breakdown of the merger possibility, NYSE Euronext looks attractive as a possible value stock investment. Using the Wall Street consensus estimates, growth is expected to slow in 2012, with revenue increasing by 1.5% and earnings per share growing by 10 percent. The trailing P/E ratio is 11.4 and the forward ratio is 10.3 times expected 2012 earnings. The final piece of the value pie is the current 4.3 percent dividend yield. The quarterly 30 cents per share dividend has been in effect since the second quarter of 2008. The current dividend payout ratio is 50 percent of 2011 net income and management has some room to boost the payout. Since the market peak at the end of 2007, NYX has under-performed the S&P 500 stock index by almost 60%. The index is down 10% and NYX is almost 70% lower than where the shares stood at the end of 2007.

A major goal for the NYSE Euronext management is expansion into more derivative securities trading. The fees earned from the facilitation of electronic stock trading are very small compared to what can be earned by an exchange in options or futures trading. The company has a good derivatives presence in Europe and is expanding offerings in the U.S. including the NYSE LIFFE trading of index futures trading. In the 2011 third quarter, derivatives trading for the company produced almost as much operation income as the cash trading of stocks and listing fees. And the operating from income was up about 35 percent from the 2010 third quarter.

It is interesting to consider a merger of NYSE Euronext and Intercontinental Exchange. The products and markets of the two companies are quite complimentary. The same probably cannot be said about the management styles of the two. ICE is the new upstart, going after the business currently controlled by CME and doing a pretty effective job. Plus ICE has significant operations in Canada and Europe. The NYSE is about as far from upstart as you can get. If the two did reach a merger agreement, it would be an interesting process to watch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.