NYSE-Deutsche Boerse Deal Gains So CEO Can Close Sale: Real M&A

NYSE Euronext CEO Duncan Niederauer
Duncan Niederauer, chief executive officer of NYSE Euronext. Photographer: Jin Lee/Bloomberg

It’s never been cheaper for Duncan Niederauer to buy votes from NYSE Euronext’s shareholders to fend off Nasdaq OMX Group Inc.’s $11.3 billion offer for the 219-year old exchange.

The difference between Nasdaq OMX’s higher bid and NYSE Euronext’s preferred deal from Deutsche Boerse AG has narrowed to $3.07 a share, according to data compiled by Bloomberg. That’s the smallest gap since Nasdaq OMX made an unsolicited offer with IntercontinentalExchange Inc. on April 1. NYSE Euronext and Deutsche Boerse, mulling financial incentives to win support, can now top Nasdaq OMX with $805 million in cash, less than half the cost when the competing bid was announced.

While NYSE Euronext’s directors have rejected the rival offer twice, its owners last week told Niederauer, the bourse’s chief executive officer, they aren’t getting enough compensation from his February agreement to sell the company to Deutsche Boerse for $9.5 billion in stock. Needing at least half of NYSE Euronext’s holders to back the bid by July, a dividend would help quell investor dissatisfaction and siphon off interest in Nasdaq OMX’s cash-and-stock offer, which is currently 7.8 percent higher, according to Haverford Trust Co.

“Sweeten the deal and make it on par with the Nasdaq-ICE offer,” said Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford Trust, which manages $6 billion and owns shares of NYSE Euronext. “The Deutsche Boerse merger with the New York Stock Exchange is a better deal to build a superior exchange company, but price matters. Give us a little bit. It would end the discussion.”

Going Hostile

Nasdaq OMX of New York and Atlanta-based ICE said yesterday they intend to take their offer directly to shareholders, turning their proposal into a hostile takeover, after NYSE Euronext Chairman Jan-Michiel Hessels said the bid was an “empty vessel” and wouldn’t create as much long-term value.

The tender offer is largely symbolic because NYSE Euronext’s governing documents, mandated by the U.S. Securities and Exchange Commission, prevent investors from accumulating a 20 percent stake in the company without the board’s approval.

Robert Rendine, a spokesman for New York-based NYSE Euronext, declined to comment on whether the exchange planned to offer shareholders an increased payout. Deutsche Boerse’s Naomi Kim and Frank De Maria at Nasdaq OMX also declined to comment. ICE spokeswoman Kelly Loeffler didn’t respond to a phone call.

Deal Terms

In the Nasdaq OMX-ICE offer, NYSE Euronext owners will get 0.4069 Nasdaq OMX share, 0.1436 ICE share and $14.24 a share in cash. The deal currently values each NYSE Euronext share at $42.26, based on yesterday’s closing stock prices.

Deutsche Boerse and NYSE Euronext, which announced their all-stock transaction on Feb. 15, will give shareholders of NYSE Euronext 0.47 in the combined entity for each share they own.

That deal currently values NYSE Euronext at $39.19 a share, or $3.07 less than the Nasdaq OMX bid, according to data compiled by Bloomberg. NYSE Euronext closed at $40.40 yesterday.

The Nasdaq OMX-ICE bid premium over Deutsche Boerse’s offer has narrowed from as much as $8.47, or 24 percent, according to data compiled by Bloomberg. The gap has diminished as Deutsche Boerse’s shares rallied 6.7 percent since April 1 and the euro appreciated. In dollars terms, the bourse that traces its roots back to the Frankfurt Stock Exchange and the medieval fairs of the 11th century has advanced 12 percent over that span.

Financial Incentives

While Niederauer, 51, and Hessels, 68, told shareholders on April 28 at NYSE Euronext’s annual meeting they haven’t met with Nasdaq OMX and ICE because their bid isn’t legitimate, four people with direct knowledge of the matter said last month that NYSE Euronext and Deutsche Boerse were considering financial incentives to win support for their offer.

No decisions had been made, according to the people, who declined to be identified because the discussions are private. If action is taken, it is unclear whether a special dividend or another form of payment would be made before or after the deal’s closing and which shareholders would get it.

To beat the Nasdaq OMX-ICE bid by a penny, NYSE Euronext would have to pay its owners a one-time dividend of $3.08 a share or persuade Deutsche Boerse to increase its offer by the same amount in cash at current prices and prevailing exchange rates. With 261.2 million outstanding shares of NYSE Euronext, the outlay would equal about $805 million, according to data compiled by Bloomberg.

That’s 59 percent less than on the day Nasdaq OMX and ICE announced their counter offer, when bridging the gap would have cost almost $2 billion, the data show.

‘Plenty of Financing’

“Our expectation is that NYSE-Deutsche Boerse will resolve this so that full value will be given to the NYSE shareholders,” said Michael Shinnick, a South Bend, Indiana-based money manager at Wasatch Advisors Inc., which oversees $10.5 billion and has invested in NYSE Euronext. “We’re getting close to what we consider fair value for NYSE. There’s plenty of financing around for NYSE-Deutsche Boerse to boost their bid.”

NYSE Euronext, which has $351 million in cash, will earn $2.49 a share this year on a fully diluted basis and pay $1.20 a share in dividends, according to analysts’ estimates compiled by Bloomberg. That would leave the exchange with about $337 million in retained earnings, the data show.

For Charles Rauch, primary credit analyst for NYSE Euronext at Standard & Poor’s in New York, the narrowing gap between the bids may ultimately mean NYSE Euronext won’t have to offer anything for its preferred proposal to win shareholder approval.

‘Keeps Shrinking’

“A special dividend is not a done deal,” he said. “If the premium keeps shrinking, do they even need to do it?”

Combining NYSE Euronext and Deutsche Boerse would create an exchange company with operations in 11 countries generating 5.6 billion euros ($8.3 billion) in sales and 869 million euros in profit annually. Earnings before interest and taxes for the combined exchange would have been 1.1 billion euros in the year ending Dec. 31.

For Nasdaq OMX, the deal would give it a monopoly on listing companies in the U.S., the world’s largest capital market, and ownership of the New York Stock Exchange, formed in 1792 under a sycamore tree on Wall Street. ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets.

One way for NYSE Euronext to end the bidding contest would be to borrow a “substantial amount” to pay the dividend, according to a report from Patrick O’Shaughnessy, an analyst for St. Petersburg, Florida-based Raymond James Financial Inc.

Credit Ratings

The debt, which Nasdaq OMX alone would have to assume based on its joint bid with ICE, would undermine Nasdaq OMX’s ability to keep its investment-grade rating, he said.

Nasdaq OMX, which has $2.15 billion in long-term debt and $4.79 billion in equity value, is rated Baa3 by Moody’s Investors Service, its lowest investment grade, according to data compiled by Bloomberg. NYSE Euronext, with $2.16 billion in long-term borrowings and a market capitalization of $10.6 billion, is rated A3, or four levels above junk, the data show.

“Our sense is that most NYSE shareholders prefer the strategic logic of the Deutsche Boerse merger, but are still uncomfortable with the current value gap,” O’Shaughnessy said in the note. Taking on a “substantial amount of debt to pay out a special dividend might effectively end Nasdaq’s ability to afford the deal,” he wrote.

NYSE Euronext shareholders will vote on the Deutsche Boerse deal on July 7. Owners controlling at least half of NYSE Euronext must back the transaction for it to be approved, compared with 75 percent at Deutsche Boerse.

‘Rather Low’

All board members of NYSE Euronext won re-election last week, getting about 80 percent support, according to a preliminary vote count. That level was “rather low,” said Ted Allen, head of publications and governance counsel at ISS Proxy Advisory Services.

NYSE Euronext’s five biggest owners as of Dec. 31 -- T. Rowe Price Group Inc., BlackRock Inc., State Street Corp., Vanguard Group Inc. and Legg Mason Inc. -- controlled 22 percent of the company’s stock, ISS data show.

Bill Miller, the chief investment officer of Legg Mason Capital Management Inc. in Baltimore, said April 27 that NYSE Euronext’s refusal to meet with Nasdaq OMX is inconsistent with the company’s obligations.

“Given that there have been rumblings to deal with Nasdaq, anything that boosts the Deutsche Boerse bid now would help quell that,” said Jeff Middleswart, who owns about 18,000 shares of NYSE Euronext and 30,000 shares of Nasdaq OMX as president of Behind the Numbers LLC in Dallas. “As long as they’re within shouting distance, then NYSE can make the case why we think this is a better bid, for reasons one through nine. That would take some of the steam away from Nasdaq.”

Overall, there have been 8,215 deals announced globally this year, totaling $823.5 billion, a 25 percent increase from the $657.4 billion in the same period in 2010, according to data compiled by Bloomberg.

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