• CEO says he has access to money, shareholders want growth
  • Acquisitions played central role in making ICE a powerhouse

Your move, Jeff Sprecher.

The chief executive officer of Intercontinental Exchange Inc. has to decide whether to bid for London Stock Exchange Group Plc now that Deutsche Boerse AG and LSE have announced an all-share deal that they’ve described as a merger of equals. ICE, the owner of the New York Stock Exchange, confirmed on March 1 it’s considering a bid. It has started lining up financing, people familiar with the matter said last week.

Jeffrey Sprecher
Jeffrey Sprecher
Photographer: Andrew Harrer/Bloomberg

Sprecher largely built ICE on acquisitions as it grew from a small commodities trading platform at the turn of the century into the world’s second-largest exchange operator. Now he’s evaluating whether LSE fits strategically, according to two people familiar with the deliberations who asked not to be named, citing confidentiality. ICE is also weighing the impact of a bid on its shareholders and its debt levels, the people said.

The interest in LSE is driven by increasing global competition in an industry that’s consolidating, leaving fewer acquisition targets. A buyer of LSE gets the biggest equities exchange in Europe by value of its listed companies, a majority stake in the world’s largest clearinghouse for interest-rate swaps, and a profitable index business. Combining ICE and the LSE would create the largest exchange operator.

Sprecher’s record of serial acquisitions, however, may complicate a bid for LSE.

His past tie-ups include NYSE Euronext, a 2013 deal that gave him the New York Stock Exchange and the Liffe derivatives market. The European Commission had previously blocked Deutsche Boerse from buying NYSE Euronext. In December, Sprecher spent almost $6 billion buying Interactive Data Holdings Corp., a bond-pricing service, and Trayport, an energy-trading platform.

Those last two deals could impede Sprecher’s next move, at least if he wants to use debt to fund a bid. The Interactive Data and Trayport acquisitions have pushed ICE’s debt to almost three times its earnings. The firm has told analysts it wants to reduce its borrowing to twice its earnings.

“This opportunity’s come at a somewhat inconvenient time for them given that they are on a deleveraging path,” said Peter Nerby, lead analyst on ICE at Moody’s Investors Service.

The all-share Deutsche Boerse deal values the LSE at 10 billion pounds ($14.2 billion) based on the March 16 closing share price, according to data compiled by Bloomberg.

As of Dec. 31, ICE’s “adjusted” debt -- a figure provided by the company that doesn’t conform to generally accepted accounting principles -- amounted to $7.34 billion, versus $2.59 billion of adjusted earnings before interest, taxes, depreciation and amortization in the previous 12 months. That debt-to-Ebitda ratio of 2.8 is what ICE is aiming to reduce.

‘Access to Capital’

Speaking hours after Deutsche Boerse and LSE revealed their agreement, Sprecher said that as a public company, ICE can raise money.

“We have access to capital and an expectation by our investors and customers that we’re going to continue to evolve and grow and use those capital markets,” Sprecher said Wednesday during a panel discussion at the annual Futures Industry Association conference in Boca Raton, Florida. ICE’s stock is valued at almost $28 billion, second only to CME Group Inc.’s almost $33 billion market capitalization among exchange owners.

Sprecher provided no further details. A spokeswoman for ICE declined to comment.

Sprecher spoke on stage alongside top executives from Deutsche Boerse, CME and other exchange owners. The moderator, FIA CEO Walt Lukken, joked that their lawyers said they could speak freely. Phupinder Gill, CME’s CEO, played along, saying, “My ex-general counsel was the one you spoke to.”

Gill’s company may also be eyeing LSE. CME is working with advisers to assess whether it could challenge the deal with Deutsche Boerse, people familiar with the matter said earlier this month. While a bid for LSE is the most likely option, discussions are at an early stage and Chicago-based CME may choose not to proceed, they said.

It’s not clear whether an ICE offer would include cash or how it would be structured, but a cash component and premium would probably be required to entice LSE shareholders to back an American offer over the Deutsche Boerse deal. The NYSE Euronext purchase was made with a mix of stock and cash. Sprecher later raised money by spinning off Euronext NV through an initial public offering, paying off debt by separating his company from the operator of stock exchanges in Paris and Amsterdam.

Track Record

ICE is said to be considering selling LSE’s Italian stock-exchange business and a French clearing concern, though it would keep the eponymous London Stock Exchange.

“They have a decent track record in doing these things,” Nerby said. “ICE has delivered promptly in past acquisitions.”

Deutsche Boerse faces its own constraints. Its deal for LSE is currently funded solely with stock, giving 54.4 percent of the combined company’s equity to Deutsche Boerse shareholders. In a bidding war, CEO Carsten Kengeter’s ability to raise his offer with debt would have to be judged against his desire to keep his credit rating. Deutsche Boerse is rated AA by Standard & Poor’s; ICE is rated A. Both have negative outlooks, which means they could get downgraded, raising their borrowing costs.

Deutsche Boerse’s ratio of leverage to earnings would be reduced to 1.7 times from 1.9 times if it successfully combines with LSE, according to a statement Wednesday based on Dec. 31 figures.

Kengeter said last month that his “war chest is impaired a little,” a situation that developed after he spent 725 million euros ($822 million) buying currency trading platform 360T and 660 million euros on indexing business Stoxx AG last year. On March 9, Deutsche Boerse agreed to sell its U.S. options exchange to Nasdaq Inc. for $1.1 billion in cash.

“The only reason the rating has not gone down is that we are expecting them to deleverage,” said Giles Edwards, the primary credit analyst covering Deutsche Boerse at S&P. “If they do that sufficiently by the end of the year, that’s all right.”

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