Nasdaq Top Deal Target Given Cheapest Valuation: Real M&A
With the takeover of NYSE Euronext poised to close, buyers seeking the next exchange purchase will find no cheaper target than Nasdaq OMX Group Inc. (NDAQ)
For potential acquirers, Nasdaq OMX has the lowest price-earnings ratio among exchanges valued at more than $5 billion even after surging 33 percent in 2013, according to data compiled by Bloomberg. The New York-based operator of U.S. and European bourses recently made it easier for suitors by cutting the shareholder approval threshold for removing directors to a simple majority from a two-thirds vote.
“Anyone who has a good calculator and a checkbook ought to be looking,” C.T. Fitzpatrick, who oversees about $2.5 billion as chief investment officer of Vulcan Value Partners LLC in Birmingham, Alabama, said in a phone interview. “Particularly when you look at the multiples being paid for other exchanges, Nasdaq looks very attractive.”
The industry would benefit from more consolidation, even after IntercontinentalExchange Inc. (ICE) buys NYSE Euronext, as firms wrestle with tougher securities regulations, according to Vulcan Value, a Nasdaq OMX shareholder that also said the company’s valuation makes it a potential target. Aite Group LLC said Nasdaq OMX has made itself more attractive to suitors by diversifying its business, even though it lags behind some peers in futures. Impediments to a deal could include opposition by politicians concerned about foreign ownership of a U.S. bourse.
Robert Madden, a spokesman for Nasdaq OMX, declined to comment when asked whether the company would be open to selling itself.
Nasdaq OMX, which has a market value of $5.5 billion, has struck its own deals over the years amid Chief Executive Officer Robert Greifeld’s strategy of diversifying the company.
In 2013, it agreed to purchase eSpeed, a platform for trading U.S. Treasuries, for $750 million in cash plus stock, and it spent $390 million to buy an investor-relations service from Thomson Reuters Corp. The company became a trans-Atlantic corporation by acquiring OMX AB in 2008.
“They are highly acquisitive,” Howard Chen, a New York-based analyst at Credit Suisse Group AG, said in a phone interview. “I don’t anticipate that will change.”
As exchanges seek to enter new markets and introduce different products to weather lower trading volume, many operators including Nasdaq OMX could be takeover targets, said Sang Lee, managing partner and co-founder of Boston-based Aite.
“There certainly is need for more consolidation from the perspective of the exchanges to remain competitive,” Lee said in a phone interview. Nasdaq OMX may be attractive as a potential target because it’s “a fully grown, integrated exchange with presence across different asset classes.”
Among 11 exchange owners worldwide with market values exceeding $5 billion, the median price-earnings ratio is about 22, data compiled by Bloomberg show. Nasdaq OMX is at 13.5, the lowest in the group. When Atlanta-based ICE agreed to purchase New York-based NYSE Euronext in December, the target company’s multiple jumped from less than 12 to the current level of 20.8. ICE fetches 22.7.
Nasdaq OMX is a “very undervalued, very attractive company,” Vulcan Value’s Fitzpatrick said. “There’s nothing there that’s not to like. It could be someone in the industry, it could be another exchange, it could be a financial buyer.”
One rival that could try to buy Nasdaq OMX is Deutsche Boerse AG (DB1), said Thomas Caldwell, the chairman of Toronto-based Caldwell Securities Ltd. European regulators barred Frankfurt-based Deutsche Boerse from buying NYSE Euronext in 2012, citing the dominance over the region’s derivatives trading that the combined entity would have had.
Deutsche Boerse CEO Reto Francioni said at a conference last month that more exchange consolidation was inevitable, though he added that regulators remain an obstacle. NYSE Euronext agreed to sell to ICE after U.S. regulatory changes prompted stock trading to fragment over 13 American exchanges and dozens of alternative platforms, crimping industry profits. ICE specializes in commodities futures.
“With the exchanges, it’s no secret everyone’s looking for a partner,” John Feng, a Stamford, Connecticut-based managing director at Greenwich Associates, said in a phone interview. “Ultimately, exchanges are a scale-driven business.”
History shows nationalism could impede Nasdaq OMX’s sale prospects. When NYSE Euronext and Deutsche Boerse announced their ultimately unsuccessful union, U.S. Senator Charles Schumer, a New York Democrat, said his support for the deal was contingent on it being a merger of equals. Singapore Exchange Ltd. (SGX) dropped its 2010 bid for ASX Ltd., owner of the Australian bourse, after failing to win government support in Australia.
Private-equity suitors could be lured to Nasdaq OMX’s cash generation and low valuation, although their ability to leverage the company might be limited, said Andrew Wellington, the New York-based managing partner and chief investment officer of Lyrical Asset Management.
At 9.8 percent, Nasdaq OMX’s free cash flow yield is greater than every similar-sized peer and almost twice the group median of about 5.2 percent, according to data compiled by Bloomberg. The company has about $2 billion in debt. Wellington said Nasdaq OMX should be valued close to $50 a share in a takeover, about 50 percent more than yesterday’s closing price of $33.24.
“It’s a phenomenal business and generates a ton of cash,” Wellington, whose firm oversees about $624 million including Nasdaq OMX shares, said in a phone interview. “It’s currently underappreciated by the market.”
Today, the shares rose 0.1 percent to $33.27.
Carlyle Group LP, a private-equity firm based in Washington, might have the most knowledge of Nasdaq OMX. Its chief financial officer, Adena Friedman, was the exchange owner’s CFO until 2011.
Chris Ullman, a Carlyle spokesman, declined to comment.
Nasdaq OMX’s recent shift from supermajority voting to remove directors and approve other measures gives shareholders more influence, said Nell Minow, founder of GMI Ratings, which evaluates corporate governance. Nasdaq OMX had described the prior requirement as a defense against “coercive takeover tactics.”
“Takeovers should be hard, but they should not be so hard that they are impossible,” Minow said in a phone interview. “When companies have a supermajority in place, that’s very entrenching of management and it makes it possible for them to turn down opportunities that would be much better for the long-term sustainability of the enterprise.”
Stock exchanges generally get lower price-earnings ratios than venues focused on other assets, explaining why Nasdaq OMX’s multiple is relatively low, said Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners LP. That may make the company potentially less attractive for acquirers as well, said Lee of Aite Group.
Still, Credit Suisse’s Chen said there’s a chance Nasdaq OMX could be forced into a merger if its rivals keep getting snapped up.
“There’s a low probability of that happening anytime soon,” the analyst said. Still, “if you’re running in a world where your competitors are gaining scale, then perhaps you would merge or find a bigger buyer.”