Diminished Deutsche Boerse-NYSE Merger Can Return 45%: Real M&A

Diminished Deutsche Boerse-NYSE Merger Can Return 45%
Shareholders of Deutsche Boerse, which traces its roots back to the Frankfurt Stock Exchange and the medieval fairs of the 11th century, will swap their shares and own 60 percent after the transaction is completed. Photographer: Hannelore Foerster/Bloomberg

The Deutsche Boerse AG acquisition of NYSE Euronext is valuing the owners of the New York Stock Exchange and Frankfurt bourse at $16.6 billion, about the same as the German exchange when the deal was announced in February -- diminished by the European debt crisis and an economy teetering on the brink of recession. For all of the disappointment, traders buying NYSE Euronext shares today can make 45 percent after the deal is approved by regulators.

Since the two venues agreed to merge, the value of the acquisition has fallen more than any all-stock takeover in the U.S. this year as investors fled European equities, according to data compiled by Bloomberg. NYSE Euronext owners lost billions of dollars by tying themselves to Deutsche Boerse’s stock, which slid almost 40 percent from $16.2 billion eight months ago.

While the decline now implies the Frankfurt-based exchange has virtually nothing to gain from buying the symbol of American capitalism, the combined entity may still be worth $24 billion, based on next year’s earnings and the prices that comparable companies command, data compiled by Bloomberg show.

“The deal decline is not a reflection of what value is being created,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist for Tullett Prebon Plc, said in a telephone interview. “It’s hard for me to believe that the market really believes that NYSE isn’t adding any value. Does that present a buying opportunity? Yes.”

Medieval Fairs

Deutsche Boerse’s Naomi Kim declined to comment on the decrease in the value of the takeover.

Rich Adamonis, a spokesman for New York-based NYSE Euronext, said in a telephone interview that “our proposed merger with the Deutsche Boerse will produce efficiency gains and accelerate our standalone strategy.”

The agreement to buy NYSE Euronext was part of more than $30 billion in announced takeovers as the world’s biggest exchanges turned to dealmaking to trim costs and produce more revenue from trading in equities, options and futures.

The combination will create the world’s largest futures exchange. It will also control 41 percent of U.S. options, helping to offset declines in equities trading.

The takeover, approved by shareholders and boards of directors at both companies, won out over a hostile offer from Nasdaq OMX Group Inc. of New York and IntercontinentalExchange Inc. in Atlanta after regulators signaled they would block it.

NYSE Euronext’s owners will get 0.47 shares in the merged entity for each share they own. Shareholders of Deutsche Boerse, which traces its roots back to the Frankfurt Stock Exchange and the medieval fairs of the 11th century, will swap their shares and own 60 percent after the transaction is completed.

Acquisition Detail

At the time of the announcement, the agreement valued NYSE Euronext’s 40 percent stake at $9.53 billion. It has since dwindled by about a third to $6.4 billion, data compiled by Bloomberg show. The decline is the largest of any all-stock takeover in the U.S. of at least $1 billion.

With Deutsche Boerse valued at $10.2 billion, the merged entity would be worth just 3 percent more than the German bourse’s capitalization before the acquisition was announced.

Shares of NYSE Euronext and Deutsche Boerse have retreated as concern increased that Europe’s debt crisis will trigger a recession and the Federal Reserve said there are “significant downside risks” to the U.S. economy.

Germany’s 30-company DAX Index has slid 25 percent from its high on May 2 on speculation the nation will have to bail out European governments to keep them from defaulting as the region’s finance chiefs clash over how to assist Greece. Germany is the chief underwriter of emergency loans offered to Greece, Ireland and Portugal.

Transaction Tax

European Union proposals for a financial-transaction tax have also dragged down Deutsche Boerse and NYSE Euronext, which owns exchanges in Amsterdam, Lisbon, Paris and Brussels, as well as London-based Liffe, Europe’s second-largest derivatives market. The EU last month proposed a tax that would apply a levy of 0.1 percent on trading of stocks and bonds, with a 0.01 percent rate for derivatives contracts, starting in 2014.

NYSE Euronext has tumbled 38 percent since the deal was announced on Feb. 15, in line with Deutsche Boerse’s 37 percent drop. The declines are more than double the 18 percent slide for Nasdaq OMX. London Stock Exchange Group Plc has lost 14 percent.

“In retrospect, as a New York Stock Exchange holder, I would have appreciated greater cash consideration on the deal,” said Tim Hoyle, research director for Radnor, Pennsylvania-based Haverford Investments, which oversees $6.5 billion, said in a telephone interview.

Sum of Parts

Still, “we’re considering adding to our New York Stock Exchange position,” Hoyle said. “The markets have discounted the value of the deal because of macro uncertainties, but the prospects for both companies remain positive.”

Deutsche Boerse and NYSE Euronext currently trade at less than 9 times analysts’ estimates for 2012 earnings, versus an average of 15.2 times for exchanges worldwide, according to data compiled by Bloomberg. By applying the multiples of their closest competitors across each of their four main businesses -- equity trading and listings, derivatives, settlement and custody, and market data and technology -- the merged company could command a valuation of 12 times, the data show.

That would give the company a $24 billion capitalization, based the $2 billion in net income that the two exchanges will earn next year, analysts’ estimates compiled by Bloomberg show.

NYSE Euronext in August posted better-than-estimated second-quarter earnings and sales, the 10th straight quarter that it beat projections, data compiled by Bloomberg show. That’s prompted analysts to boost their earnings estimates for 2011 and 2012 by 3.4 percent and 0.9 percent, respectively.

Earnings Estimates

For the companies in the Bloomberg World Exchanges Index, profit estimates are down 13 percent for 2011 and 15 percent for 2012 in the same time period, the data show.

NYSE Euronext and Deutsche Boerse are also forecasting 400 million euros ($537 million) in cost savings and intend to boost revenue by about 150 million euros from the merger, according to an earnings presentation from NYSE Euronext on Aug. 2.

Creating a transatlantic exchange that generated more than twice as much revenue in the past 12 months as any other trading venue in the world is drawing scrutiny from European regulators.

Joaquin Almunia, the European Union’s antitrust commissioner, said last month that he’s “concerned” the deal may monopolize the derivatives market.

The exchanges received this week a statement of objections listing the European Commission’s “provisional position” on the merger and laying out possible competition issues.

‘No-Deal Basis’

The EU can require companies to change their behavior or sell off units to eliminate competition concerns. It has a Dec. 13 deadline to rule on the deal, which it can extend.

For Thomas Caldwell, chief executive officer of Caldwell Securities Ltd. in Toronto, NYSE Euronext has fallen so much that betting on its future now outweighs the risks.

“The market is telling you it’s valued on almost a no-deal basis,” Caldwell said in a telephone interview. “Fundamentals are no longer the determining factor in the stock price, it’s geopolitical events, it’s financial crises. There’s so much else that’s impacting the stock prices now, and the New York Stock Exchange is at a pretty good buying level.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE