Deutsche Boerse AG is exploring a sale of International Securities Exchange Holdings Inc., the U.S. options business it acquired in 2007 before industry growth stalled, people with knowledge of the matter said.
The exchange operator has been studying the matter internally for several months and hasn’t reached out to any buyers, the people said, asking not to be identified discussing private information. ISE, which Deutsche Boerse acquired for $2.8 billion, may fetch $1 billion to $1.5 billion in a sale, one of the people said.
The operator of the Frankfurt stock exchange is considering a sale of ISE after heightened competition in the U.S. options market stifled the unit’s prospects, the people said. Deutsche Boerse, which was criticized by some shareholders in 2007 for paying too much for ISE, has already written down more than one-third of the value of the purchase amid a sharp slowdown in the growth of options trading.
“On paper, there are good reasons to sell including the business didn’t fulfill expectations, there’s stiff competition and the market isn’t seeing growth,” said Martin Peter, an analyst at Landesbank Baden-Wuerttemberg in Mainz, Germany. “But selling it now during the low point in the cycle is very questionable and would be admitting that it was a bad acquisition.”
While Deutsche Boerse had intended for ISE to be part of a larger platform in the U.S., its stateside expansion plans were hobbled when European regulators blocked its proposed $9.5 billion merger with NYSE Euronext in 2012. Deutsche Boerse’s lawyers this week called the veto “wrong” as it argued for a right to make future acquisitions in a hearing before the European Union’s General Court.
A spokesman for the exchange declined to comment on its plans for ISE.
ISE started in 2000 and is helmed by Chief Executive Officer Gary Katz, who has guided the electronic exchange to a more than 15 percent share of U.S. options volume. The success came as activity migrated off of trading floors and onto electronic venues.
Atticus Capital LLC, Deutsche Boerse’s biggest shareholder at the time of the ISE purchase, said the takeover would erode shareholder value, and some analysts said the exchange may have paid too much.
After paying $2.8 billion for ISE in 2007, Deutsche Boerse booked a combined 873 million euros ($1.1 billion) of writedowns on the unit in 2010 and 2011, citing “stagnation in the U.S. equity options market in 2009” for the first charge.
Trading of U.S. options is distributed across 12 exchanges, including the two that ISE runs as well as those operated by CBOE Holdings Inc. and Nasdaq OMX Group Inc.
The growth of trading in stock options - contracts which give their investors the right to buy or sell shares of a company at a specified price within a certain time-frame -- averaged 3 percent in the five years through 2013, data from Options Clearing Corp. show. That’s down from an average of 32 percent in the previous five years.