BATS Global Markets, Inc. (BATS:BATS) priced its upsized 13.3 million share IPO @ $19.00, the top of the anticipated range. The company raised $252.7 million, and will have a market cap of approximately $1.82 billion. All of the shares being sold are by the stockholders, including (but not limited to) BofA Merrill Lynch (NYSE:BAC), Citigroup (NYSE:C), Instanet, JPMorgan (NYSE:JPM), Knight, and Goldman Sachs (NYSE:GS). The bookrunning managers on the offering are Morgan Stanley (NYSE:MS) and Citigroup.
BATS is a leading global exchange operator, with a #2 overall market share in the U.S. equity market (with 21% share), only behind NYSE and ahead of the NASDAQ (NASDAQ:NDAQ), and a leading share in U.S. ETFs. It also has a #1 market share in European equities with a 24% share (ahead of the LSE, Euronext and Deutsche Borse); and growing share in both the U.S. options and global FX. It prides itself as being founded through technology, and believes this is its competitive advantage. It claims that through technology, it is a low-cost operator known for speed, reliability and stability. It also boasts its efficiency and low overhead, with just 286 employees and $823k in EBITDA per employee for 2015.
The company has been growing rapidly, with 32% total net revenue CAGR over the last five years (12% organic), and 41% normalized EBITDA CAGR. For 2015, it had $384M in net revenue and $235M in normalized EBITDA (a 61% margin). Each of its segments has an EBITDA margin over 60%. Subscription revenue (market data and connectivity) has grown from $75M in 2011 to $213M in 2015 and represents 55% of the total revenue while the other 45% is transaction revenue.
While the company has experienced significant growth in the last five years, it believes it has plenty of growth ahead. In the U.S. options market, it currently has only a 9.6% share, and that only accounts for the price-time segment of the market, which is less than 30% of the overall market. The company is now moving into other areas which include auction and complex options which will allow it to compete in the remaining portion of the market. BATS also believes that its leadership position in ETFs will continue to supply continued growth, both from market share, as well as the rapid growth in ETFs themselves; ETF assets grew at a 27% CAGR from 2001 to 2015 (from $.1Tn to $3Tn). Other areas of growth outlined include global FX, subscription revenue, and additional strategic acquisitions.
The company did attempt an IPO in March 2012 when it priced 6.3 million shares at $16 (the bottom of the previous range). The company had a software bug that disrupted trading, and due to strong investor backlash, the offering was cancelled. This time, the company says it is ready to go, with multiple series of testing.
The stock will be the first U.S. equity IPO to list on its own exchange, the BATS BZX Exchange (BZX). It will also be the first non-healthcare IPO to price in the U.S. this year. The high-end pricing and strong investor demand, with books said to have been multiple Xs oversubscribed early in the week, suggest that investors are looking past the previous offerings issues.
At the high-end pricing, BATS is still coming at an approximate 10% discount to the NASDAQ, based on forward P/E estimates. One could argue that based on the stronger top- and bottom-line growth rates of BATS that it should trade at a multiple at least in line and potentially a premium to the NASDAQ.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BATS over the next 72 hours.
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