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IntercontinentalExchange, Inc. (NYSE:ICE)

Merger Call

June 3, 2008, 9:00 am ET


Jeffrey C. Sprecher – Chairman, Chief Executive Officer – IntercontinentalExchange, Inc.

Sunil Hirani – Chief Executive Officer – Creditex

Scott A. Hill – Chief Financial Officer – IntercontinentalExchange, Inc.

Kelly Loeffler – Vice President Investor Relations and Corporate Communications, IntercontinentalExchange, Inc.


Robert C. Rutschow – Deutsche Bank North America

Jonathan Casteleyn – Wachovia Capital Markets

Punda Akar – J. P. Morgan

Christopher Donat – Sandler O’Neill and Partners Leigh Parrish


Good morning, ladies and gentlemen, and welcome to the IntercontinentalExchange and Creditex Merger Conference Call. My name is Karen and I will be your coordinator for today.

At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Ms. Kelly Loeffler, Vice President of Investor Relations and Corporate Communications. Please proceed.

Kelly Loeffler

Thank you and good morning. To obtain a copy of the announcement of the ICE-Creditex merger agreement and the related investor presentation please visit the investor and media section of our website at These items will be archived and our call will be available for replay.

Please be aware that our comments may contain forward-looking statements. These statements represent our current judgement and are subject to various risks, assumptions, and uncertainties as outlined in the company’s filings with the SEC. Actual results may differ materially from those that are expressed or implied in any forward-looking statements. Please refer to our filings with the SEC, including our most recent Form 10K and our Form 8K filed this morning. These filings contain a description of the risks that could cause results to differ materially from those that are described in the forward-looking statements.

With us today are Jeff Sprecher, ICE Chairman and CEO, Sunil Hirani, Chairman and CEO of Creditex, and Scott Hill, ICE’s chief financial officer. After our prepared remarks we’ll take your questions. We’ll conclude the call by 9:30. I’ll now turn the call over to Jeff.

Jeffrey C. Sprecher

Thank you for joining us this morning on what was relatively short notice. I’m very pleased to be here in New York with Sunil and our new colleagues at Creditex. Many of you have heard me talk about the opportunity to serve the credit derivatives asset class, so we’re very excited to announce our merger with a leader in the OTC market for credit derivatives.

When we close this transaction in the third quarter ICE will add another key market to our growing range of asset classes, now including the $60 trillion credit default swap or CDS market. We won't walk you through each page of our presentation so that I can leave time for your questions, but we encourage you to review the presentation that we’ve provided.

For those of you that may not know Creditex, it’s truly a market leader in the CDS trade execution and processing space. Creditex now operates markets across North America, Europe, and Asia. Today, just eight years after its inception, they have a leading presence in the markets for the three most liquid CDS segments. These include CDS indices, single names, and index tranches (sic).

Creditex operates a leading hybrid model with both voice and electronic execution. They’ve established one of the very best brokerage teams globally and they were the first to successfully launch electronic trading for CDS in year 2004.

Creditex has worked collaboratively with its customers to effectively offer solutions for 25 of the largest dealers, both domestically and abroad, with over 1,000 active traders.

For those of you that are familiar with ICE you know that we focus on solving broad needs of our customers, which typically means reaching beyond execution services to provide a focus on the back office needs. One of the things that we’re really excited about with Creditex is their similar focus on trade processing. These pre- and post-trade services are central to increasing the risk management tools available for dealers and their customers. At ICE we’ve made substantial investments in innovating the OTC trade processing area and we’ve found that Creditex has successfully done the same.

In addition to Creditex’s dealer to dealer execution business the company has two other operating subsidiaries: T-Zero and Q-WIXX. These are businesses that provide unique processing and execution services in the CDS market.

First of all, T-Zero is the most widely adopted electronic affirmation platform for credit derivatives with support from 17 dealers, 10 prime brokers, and 196 buy-side participants. It offers straight through processing services for the inter-dealer market as well as trade affirmation services for the dealer to client market. T-Zero is the only platform today that meets the credit industry’s targets set forth by the Operations Management Group. Moreover, T-Zero is fully integrated with DTCC’s confirmation platform. So as you can see, the company is already a fixture in the emerging straight-through processing landscape.

Secondly, Q-WIXX is an electronic dealer to client list execution platform with support from 11 major credit derivative dealers and several of the world’s largest hedge funds. This innovative electronic platform was recently launched in partnership with major dealers to provide electronic OTC execution of large scale, single-name CDS lists. This is a process that is typically time consuming and prone to significant operational risks using traditional execution methods. But today Creditex is bringing value and efficiency by providing these electronic tools to dealers for their clients.

A discussion of CDS would seem incomplete without acknowledging the industry’s and regulatory calls for enhancements to the risk management offerings currently available. ICE has a history of looking for opportunities among these complex challenges and working with industry participants and regulators to develop solutions. We will endeavour to do both with Creditex.

ICE and Creditex both have a strong heritage of working collaboratively with the dealer community to provide new electronic and brokerage tools to expand their businesses. Together, Creditex and ICE are well positioned to provide a full range of services on the risk management spectrum within CDS. We think this is a winning transaction for ICE and for Creditex and, importantly, our clients and our employees with whom we will continue to build strong relationships.

I’d now like to introduce you to Sunil Hirani. He’s brought tremendous value not only to Creditex but to the CDS space globally. He leads an unbelievable team that’s taken a lot of risks to move this space forward in partnership with the dealer community. Most importantly, they generated excellent results.

Sunil, now it’s over to you.

Sunil Hirani

Jeff. Thank you very much for those comments. Good morning, everyone. I’ll just offer a few thoughts this morning in addition to Jeff’s remarks, as well as a few comments that are specifically for our clients as well as our global staff.

First, I’m absolutely thrilled that we’ve partnered with ICE. I can’t think of a more dynamic leadership team and a better partner for our employees and clients. ICE and Creditex share many values, including a culture of innovation, growth, and a commitment to serving the OTC marketplace. We will continue to operate under the Creditex brand name and with the same client service philosophy that has brought us to where we are today.

ICE’s demonstrated success in the dynamic and global OTC markets convinced us that it was the right partner to keep our markets truly within the OTC domain. We plan on remaining a dealer-only OTC execution platform and we’re committed as ever to remaining a leader in the voice, hybrid, and electronic platforms. We will continue to strive to provide an environment that will support their continued success.

In addition, our growth in electronic execution has been tremendous. For example, in the United Kingdom, where Creditex is the electronic market leader, an unparalleled 77% of our execution business is now connected electronically.

When we started Creditex just over eight years ago we knew at some point we would need to increase the scale of our operations, particularly given the need to compete against an increasingly dominant exchanges and IDB brokers in the world. With ICE as a partner we feel we are now best positioned to lead and to do so without changing the culture that has supported our success.

I’d like to extend a personal thanks to all of our employees for their tremendous efforts and the result they produced to help us get here to this point.

Finally, I’d like to emphasize to our clients that we will remain focused on partnering with them, our dealers, to drive innovation, growth, and opportunity in the credit default swap space. I very much look forward to taking Creditex to the next level with all of you and with our colleagues at ICE.

I’ll now turn the call over to Scott Hill to provide some financial details of our transaction.

Scott A. Hill

Thanks, Sunil. Good morning, everyone. I’ll just take a few minutes to review the financial terms of the merger.

While our transaction is highly strategic it will also provide us with another key growth driver by expanding our revenues through reach and diversification as we continue to seek ways to drive shareholder value.

As you can see on slide four of the presentation, total merger consideration is approximately $625 million in cash and ICE common stocks. In addition, there will be a working capital adjustment that will be determined at the time of closing.

The cash component is expected to be roughly 10% of the deal at $60 million. Of that, $50 million will be used to provide liquidity to certain Creditex shareholders that are employees.

ICE expects to use cash on hand to fund the cash component of the merger consideration. The number of shares of ICE common stock expected to be issued will represent approximately 6% of ICE’s issued and outstanding share capital following the consummation of the merger.

In the first quarter, Creditex turned in record revenues of $56 million and generated EBIDTA of $12 million. Our purchase price therefore results in a forward multiple of approximately 13 times Creditex’s first quarter 2008 EBIDTA when annualized. We think this valuation reflects the strong brand and successful hybrid franchise, with well-established voice and electronic capabilities, as well as the growth opportunities inherent in this market generally and with regard to Creditex models specifically.

We currently expect to capture approximately $10 million to $15 million in incremental pre-tax synergies during 2009. We conservatively expect the transaction to be accretive in 12 to 18 months post closing.

A detailed summary of the terms of the merger agreement will be filed with the SEC in the near future. We expect to close this transaction late in the third quarter of 2008 at which time Creditex Group will become a wholly owned subsidiary of ICE. We’ll provide additional guidance and information once the deal is closed.

Back over to you, Jeff.

Jeffrey C. Sprecher

Thank you for going through those details, Scott.

I hope that you all will take some time to review our presentation. I think it will offer a more thorough view of the tremendous assets in terms of people, technology, and resources that we’re partnering with today.

I also want to reiterate Sunil’s comments regarding our respective cultures. Our collaborative and team oriented culture extends to our client base and we look forward to the opportunity to serve a new asset class.

Operator, we’re now ready to start the Q&A section.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Ken Worthington with J. P. Morgan. Please proceed.

Punda Akar – J. P. Morgan

Good morning. This is Punda Akar (sic) calling for Ken Worthington. The first question is about the vision. Is the goal eventually to move CDS trading on exchange or is it really to bring straight through processing and clearing to a security turn or traded OTC?

Jeffrey C. Sprecher

That’s a very good question. Thank you for asking it. It’s the second thing that you mentioned. If you look at ICE’s business today, roughly half of our business is regulated, exchange traded futures. Roughly half of our business is over the counter swaps and derivatives. That model that we have at ICE is really a dealer to client model. The great thing that Creditex brings us is the third leg of the stool, which is an inner dealer market. So now ICE will have everything from inner dealer services, client to dealer services, and broad execution within the future space. We intend to run those three businesses separately, just as we have done up to now with our two different models, but we do want to combine the back end and give dealers and clients straight through processing, settlement risk management capabilities. That’s where we’ve really done a good job and I think it’s what differentiated ICE.

So no change in the model here, but a lot more investment and focus on the front and back offices in terms of risk management and processing.

Punda Akar – J. P. Morgan

Okay. That’s helpful. My second and last question is, how do you think the dealer community will react? They are working on their own exchange base service. Are there incentives to embrace your offering or do they continue to develop their own?

Jeffrey C. Sprecher

I think that you’re going to see, first of all, not a lot of change by ICE’s ownership of Creditex. But I do think that we need to be prepared for a lot of various headline risk in the CDS space. We’ve seen other interdealer brokers who have lost staff, and that’s been a headline risk. We’ve seen consortiums form up and that’s been a headline risk. We’ve seen dealers get together to try to work themselves on pre- and post-trade processing issues; those are headline risks. Because it’s an immature space I think there will be a lot of different initiatives that will emerge until one or two finally get critical mass and people coalesce around them.

I guess I’m preparing you for the fact that I think there will be more of these kinds of initiatives that will come forward. But Creditex, one of the reasons that ICE really likes the company is that they do have a very strong inner dealer franchise and we intend to protect that and nourish it, actually, and use a lot of the relationships that we have at ICE to help buttress that inner dealer relationship. Then they do have a dealer to client relationship in Q-WIXX and also in T-Zero where both the buy-side and the sell-side have come together in consortiums effectively around those businesses at Creditex. So we want to try to exploit those as best we can, provide tools for those and nurture and enhance them.

That doesn’t mean that dealers won’t find other ways of organizing. I suspect they will. I also suspect that some of the other IDBs as a result of ICE really dedicating time, resource, and capital to this space will also react. And all that will be good for the space and ultimately I think we will emerge with some interesting pieces in it.

Punda Akar – J. P. Morgan

Great. Thank you for taking my questions.


Your next question comes from the line of Chris Donat with Sandler O’Neill. Please proceed.

Christopher Donat – Sandler O’Neill and Partners Leigh Parrish

Thanks. Good morning, Jeff. I just want to be clear on one thing, to follow up on the last two questions. You will be taking Creditex, keeping the inter-dealer broker component of it, and not really introducing cleared CDS. That’s not the intention here.

Jeffrey C. Sprecher

Let me rephrase it slightly differently. The goal is not to convert Creditex into a regulated traded futures contract. I’ve maintained for a long time, ICE has maintained for a long time that the CDS space is not at a point in time when it’s looking for a solution that is a regulated future. There are so many structural issues that exist within just the by-lateral OTC interdealer space that our thinking is we can lever off of T-Zero, which is a pre-DTCC affirmation service. That we can work with the dealers on innovation. That we can work with the dealers on netting. And that ultimately there may be a clearing solution. It may not be the typical regulated futures clearing that you’re used to seeing in ICE as futures exchanges. But all that’s going to have to go through a process. As you know, Chris, the dealers themselves have been trying to organize around The Clearing Corp. Creditex is a part owner of The Clearing Corp. and a board member of The Clearing Corp., so I think we will be able to help be an asset in that initiative or provide other tools to those members that can help move the sort of traditional clearing idea along.

And as I think you also know, we have clearing houses in the UK now and in Canada. So we have some global scale that might be helpful to the dealers in trying to solve some of these issues.

Christopher Donat – Sandler O’Neill and Partners Leigh Parrish

Okay. So there are a number of different ways this could go, but for the near term the focus is on running it as an inter-dealer program for Creditex.

Jeffrey C. Sprecher

I think the near term and the long term. I think the CDS space is so complex that it’s going to, in our lifetimes, continue to be an inter-dealer space. There may be elements of it, certain kinds of contracts – the type, for example, that Creditex has already taken electronic – the very vanilla index business that is certainly going to go more electronic. Those may ultimately have sort of back office clearing capabilities that look more like our cleared OTC energy contracts. The vast majority of the CDS space is very complicated, sort of bespoke tranches and names that probably in our lifetime are not going to lead themselves into the type of swap derivative and clearing that we’ve seen in futures.

Maybe one way to sort of epitomize why I say that is that the remedy for default in clearing of futures is to grab the position and liquidate it in what is assumed to be a very liquid market with a lot of price transparency. You just don’t have that in the vast majority of the CDS legacy positions that exist inside the IDP, or inside the dealers.

There isn’t the notion that you can grab a lot of this stuff and liquidate it. I suspect if you could the dealers would be doing it already. But you can start to net those positions down, no question about that. And you can potentially provide a regulated forum in a clearing house that will give certainty under bankruptcy. Those are the kind of areas that I think we have a broad understanding of and frankly, when you look at these two businesses together, I think we’re the best positioned company now in the space to really have a dialogue with the dealers and provide solutions to them.

Christopher Donat – Sandler O’Neill and Partners Leigh Parrish

Okay. I’ll get out of the way, given 10 more minutes left in the call here.


And your next question comes from the line of Jonathan Casteleyn from Wachovia Securities. Please proceed.

Jonathan Casteleyn – Wachovia Capital Markets

Hi, good morning. Question for Sunil here. I’m just wondering, you gave us a small piece of flavour for the electronic piece of the business. Can you break out your revenues by voice, hybrid, and electronic percentages within the existing revenue base?

Jeffrey C. Sprecher

Sunil’s looking at me as the company CEO wondering if he can answer that question. I think you can give a –

Scott A. Hill

Well, actually, it’s Scott. If you look on one of the charts in the presentation, we’ve actually given you a view of the breakdown between electronic and voice for the first quarter. As we move forward and start to work with you guys on providing guidance around this business that’s one of the metrics that we’ll give you more details on. Just as an example, in the first quarter of this year the Creditex business was roughly 38% electronic and 62% voice. That was a pretty significant year-over-year increase in terms of the electronic business.

The other data point we included in the presentation is the electronic business in Europe is about 77% of the volume in the first quarter while in the US it’s only about 1%. So the electronic business is clearly more mature in Europe than it is at the current time in the US. Again, as we move forward, Jonathan, and as we get towards the closing of the deals that’s one of the metrics that we’ll keep in front of you and our investors.

Jonathan Casteleyn – Wachovia Capital Markets

Okay. Understood.

And then can you just talk about the 101 brokers you mentioned in the presentation here? Any sort of indication of stability there? I mean, obviously this is a business where you can have ‘X’ amount of production walk out the door. Is there any way they’ve been incentivized or locked up with equity awards via the transaction that gives us some indication of stability?

Jeffrey C. Sprecher

Sure. As you’re aware, we were sensitive to that issue going into this discussion and we became highly sensitive, as you can imagine, during the period that we were negotiating this deal. So we’ve done a couple things. By way of backdrop, ICE has had incredible employee retention in building our company and it’s partly because we’ve been very growth beat so we’re able to promote people, give them new responsibilities, give them equity that’s done, as you know, quite well over the last few years. We come to this with a culture of retention to begin with. So what we’ve done is, number one, we were fortunate that Creditex has an employee stock option plan. We’re going to keep that plan in place and keep adding to that plan so that there’s an equity component to compensation. In other words, the employees here don’t get cashed out at the time of closing of this deal. That plan will continue and it has overhang.

Secondly, we really do want to use stock-based compensation. We have been very successful in our other acquisitions of some smaller brokerage teams that I think you’re familiar with, Jonathan. Over time modifying with the consent and encouragement of those brokers we’ve been able to modify their compensation so that there’s more of a stock component. For the employee, that gives them the benefit of a tax-free, if you will, transaction at the time. Then for the company it aligns interest and builds long-term growth. So we’re going to try to put some of those techniques that we’ve been experimenting with in our own brokerage operation into Creditex.

And then, as you can imagine, part of the DNA of building a successful IDB, which Sunil and his team have done, is having good employment agreements and working with employees individually on those agreements, having them staggered. I think frankly as a result of the process that Creditex went through in talking to ICE and others, there are non-poach agreements that were signed between the other IDBs as part of the confidentiality agreement.

I think it will give the company time to stabilize after ICE’s acquisition. It will give the company and employees time to see what we’re willing to do.

I think, Jonathan, just to editorialize a little bit, I think you specifically asked me in the past if an exchange franchise could successfully own and operate an IDB. My answer has always been where the interest of the employees in the company are aligned I think you can. And one of the things we liked about Creditex is that they don’t fight each other in this company. They have successfully built a true hybrid of voice and screen where people are incented to help the company make money whether the trade is done on the telephone or whether it’s done on the screen.

Then just in examining the CDF space in particular, there’s clearly some very vanilla, white paint business that’s gone electronic. But there’s a lot of business that’s very bespoke and custom and lends itself to voice. So having a true hybrid is the way to own this space. I really feel that after looking at a lot of IDBs and talking to a lot of people that Sunil and his team have done just an amazing job here. That doesn’t mean that there won’t be some headline risk. It’s an immature space, so a lot is going to unfold here. But it reminds us a lot of the energy space after Enron’s collapse and the pressure that is on the space that dealers are feeling, that the regulators are feeling.

If you think about when we built our business, it wasn’t the business that you see us now as a public company. We built our business as a result of Enron’s collapse. By putting in the structural pieces for straight-through processing that ultimately brought us to where we are today. I see that same opportunity in the credit market. I’m thinking that we’ve got such good relationships with the dealers and such strong technology that there has to be a place where we can help.

Jonathan Casteleyn – Wachovia Capital Markets

Yeah. I don’t think anyone would dispute that. I mean, I think the one question we’ll get is ICE has 73% EBIDTA margins and Creditex, if I’m doing the math right, 25% EBIDTA margins. Obviously a more competitive business. So there is a fairly high hurdle rate for expected growth for ICE to maintain 50% to 60% EBIDTA margins.

Jeffrey C. Sprecher

I agree.

Jonathan Casteleyn – Wachovia Capital Markets

I think that short term investors will say, listen, has the story changed. It hasn’t changed over all, but short term obviously you are taking a more longer-term bet which people may or may not want to agree or disagree with.

Jeffrey C. Sprecher

Yeah, I agree with you. I’m also an advocate that I think incredibly high multiples in the exchange space are unsustainable and that the only way that we can sustain those businesses is if we are constantly re-investing in new tools and techniques for our client base. I’m fortunate that because of my job I get access to a lot of C-level executives in the trading arena. People don’t mind that we have high EBIDTA on electronic businesses so long as we’re trying to help them in the areas where they meet problems. If you really step back and look at companies that have customer pressures on them, they’re companies that run with these high EBIDTA margins and then gloat about them without really reinforcing the business of their customers.

When we bought NYBOT it was a very low operating margin. In that case we were able to raise quite quickly. The CDS space is so complicated and is so thorny and has grown up so quickly, it has such legacy problems in the backlog that I think it’s going to take some time before this space becomes a boy or a girl. So I hope that investors will be patient. Nonetheless, there’s certainly an opportunity for margin expansion here as we try to solve some of these problems.

Scott A. Hill

The other point I would make, too, Jonathan, is that the core Creditex business margins are pretty solid. The T-Zero and Q-WIXX businesses are relatively new invest businesses. So I think we have a good opportunity if we move forward working with Creditex to really see the opportunity in those two early stage businesses which address some of the key complexities and back office issues that are being dealt with in the credit derivative state.

Jonathan Casteleyn – Wachovia Capital Markets

Understood. Thanks for your time.


We have time for one more question. The next question comes from the line of Rob Rutschow from Deutsche Bank. Please proceed.

Robert C. Rutschow – Deutsche Bank North America

Hey. Thanks for taking my questions. Good morning. I guess the first question is, in terms of the Creditex business itself, it is still pretty dependent on brokers. I’m wondering if you can tell us what you’ve built in in terms of expectations for accretion for their revenue growth, your near term and long term outlook for growth in the CDS revenues and exactly what sort of margin expansion you’re looking for in your guidance.

Scott A. Hill

I won’t go into the specific details of what we’ve included in the model. You know we don’t tend to give projections in terms of revenue. I think Jeff made an important point earlier, which is we expect this business to continue to operate in the future as it is largely today. There will be a component of voice. There will be a component of electronic. And as the business continues to shift and we showed you the first quarter of 23% electronics became 38%, clearly that enables margins. The invest businesses of T-Zero and Q-WIXX as we start to see the growth come from the investment that Creditex has made, those will be margin helps as well as we move into the future.

We looked at this investment just as we do all of them. We took a very disciplined approach. We looked at comparable multiples. We looked at a discounted cash flow. We took a relatively conservative view, as we typically do, with regard to future revenue, and believe we’ve struck a deal that provides a return to our shareholders that will be above our cost of capital.

Robert C. Rutschow – Deutsche Bank North America

So in head count can you just give us an idea of what you’re looking for growth wise there?

Scott A. Hill

Again, I think if you look at the business they’re about 238 head count today that’s maybe 10 to 20 resources above where they were a year ago. We’re not expecting to grow this business only on the backs of brokerage growth. I think Creditex has a history of driving efficiencies in their model, so we’ve expected that those efficiencies will continue.

Robert C. Rutschow – Deutsche Bank North America

Okay. Thank you.


This concludes our question and answer session today. I would now like to turn the presentation over to Kelly Loeffler for closing remarks.

Kelly Loeffler

I just want to thank you all for joining us today. If you have any questions please give us a shout, either Sarah Stashak or myself. Thanks so much and have a great day.


Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Good day.

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