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ICE/NYSE Deal Attractive; Time To Focus On CME?

 December 24, 2012 01:04 AM

(By Mani) IntercontinentalExchange, Inc. (NYSE: ICE) and NYSE Euronext, Inc. (NYSE: NYX) have officially confirmed their $8.2 billion cash and stock merger. ICE is clearly most interested in NYSE's Life business, which would expand ICE's reach into European interest rate and equity derivatives.

The highlight is the timing of the deal as it is struck at a time when NYSE is attempting to build a clearing house in Europe while ICE owns a proven one, and regulatory changes are driving OTC swaps towards clearing houses and futures markets, which is expected to drive significant upside for transparent intermediaries.

[Related -The Nasdaq OMX Group, Inc. (NDAQ): Flash Crash Part 2 Or 83% Profit?]

ICE will pay NYSE Euronext $33.12 per share, representing a 37.7 percent premium over NYSE Euronext's previous closing share price. The acquisition combines two leading exchange groups to create a premier global exchange operator diversified across markets including agricultural and energy commodities, credit derivatives, equities and equity derivatives, foreign exchange and interest rates.

"We continue to like the deal and believe the current pro forma valuation leaves a lot of upside for the shares of both companies. That said, shares could be range-bound in the near term as investors balance a dilution of ICE's business mix with significant deal accretion," UBS analyst Alex Kramm said in a client note.

[Related -CME Group Inc (CME): Up 41% In 2013 As Fed Drives Volatility]

CME Group, Inc. (NASDAQ: CME) is the only pure-play derivatives exchange left, and could drive investor interest in and of itself as the ICE story has become too complex.

Interest-rate futures are CME's biggest business, and by buying NYSE Euronext's Liffe, ICE became the direct competitor to CME in the lucrative European market. Since the ICE-NYSE combination creates a derivative giant, CME could be forced to jump in to M&A.

CME, the world's largest future exchanges operator, has expanded through M&A by acquiring the Chicago Board of Trade and New York Mercantile Exchange while it remained unsuccessful in its bid buy the London Metal Exchange.

Meanwhile, there are rumors that CME may bid for CBOE Holdings, Inc. (NASDAQ: CBOE), while Nasdaq OMX Group, Inc. (NASDAQ: NDAQ) is also mulled as a takeover target.

If CME buys CBOE or Nasdaq OMX, it would put CME on par with IntercontinentalExchange in U.S. equity derivatives. Moreover, CME and CBOE already have exclusive rights to futures and options, respectively, linked to the Standard & Poor's 500 Index, which makes it easy for CME to pursue a bid for CBOE.

CME Group, which owns the Dow Jones stock and financial indexes, operates large derivatives and futures exchanges in Chicago and New York City, as well as online trading platforms. It also owns and CME Clearing Services, which provides settlement and clearing of exchange trades.

The exchange-traded derivative contracts include futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, rare and precious metals, weather and real estate.

"CME is our top exchange pick. The shares have underperformed in recent weeks on negative volume and open interest trends, but we believe the negativity is now more than priced in. A volume recovery and regulatory benefits could drive upside," Kramm said.



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