IntercontinentalExchange Inc (NYSE:ICE) entered into an agreement to merge with NYSE Euronext (NYSE:NYX) in December. The deal is on track, but still has some regulatory hurdles to overcome. In addition to potential benefits from the merger, ICE’s exposure to interest rate swaps can also lead to increased earnings power going forward.
Acquisition of NYSE Euronext
On the 4Q12 earnings call, management provided an update on the status of the merger with NYSE Euronext (NYSE:NYX). Analysts expect the deal will be accretive to IntercontinentalExchange Inc (NYSE:ICE) earnings in the first year. It is on track with its regulatory filings, and the companies are working together on integration and looking at possible synergies. The synergies will come from a reduction in corporate overhead, as well as merging trading platforms. There is additional accretion from migrating NYSE Euronext (NYSE:NYX)’s clearing business later this year.
Management again noted it will likely spin off the Euronext business in an IPO after the merger; however, it will not focus on this until the deal is closed. The Euronext business is less attractive since stock trading operations are generally not an area of interest. The floor operations of the NYSE are “almost an afterthought,” according to a Bloomberg article following the deal. Profit levels from equity trading have been falling behind increased electronic trading and greater interest in other vehicles from investors.
Move from Swaps to Swap Futures Benefits ICE
Both ICE and the CME Group Inc (NASDAQ:CME) stand to benefit from interest rate swap futures in 2014, which should drive current estimates higher. Swap futures offer an advantage over swaps due to the lower collateral requirements. The other benefit is the swap futures do not fall under the new regulatory reporting requirements since they are classified as futures, not swaps. This should have the effect of moving a portion of swaps to swap futures, according to analysts. Both firms will focus on gaining traction with these products with market makers.
Since the announcement of the merger with NYSE Euronext (NYSE:NYX), ICE shares are up 21%, slightly below the 23% Chicago Board of Trade is up, but better than the Nasdaq and CME Group Inc (NASDAQ:CME), which are up 14% and 13%, respectively. While NASDAQ shares have performed more in line with ICE, this table shows that NASDAQ trades at a substantial discount to the group. The growth in these companies going forward is in the futures, options and derivatives markets. CME Group Inc (NASDAQ:CME), ICE and CBOE all command a premium valuation due to the stronger growth outlook.
While the multiple has compressed since the announced acquisition of NYSE Euronext, it is an industry wide phenomena, not specific to ICE. Multiples of exchanges have compressed over recent month, with long-term volume levels acting as a headwind.