Spencer’s ICAP Seen as Next Deal Target in Acquisition Boom

Updated on
  • Tullett Prebon deal is expected to complete later this year
  • Analysts see demand from exchange companies for NEX Group

Though the sale of ICAP Plc’s legacy voice-broking business won’t be completed until later this year, analysts are already scoping out the takeover prospects for the rest of the business.

The financial technology company that will remain -- soon to be named NEX Group Plc -- will specialize in electronic markets. That’s lucrative bait for suitors, which could include London Stock Exchange Group Plc, U.S. heavyweight Intercontinental Exchange Inc. or German futures powerhouse Deutsche Boerse AG, according to Credit Suisse Group AG.  

A deal would mark another step in the 30-year evolution of the firm, which has its roots in the brokerage Michael Spencer founded called Intercapital. It would also add to a surge in dealmaking -- Deutsche Boerse’s $14 billion planned purchase of LSE would be among the biggest in the industry’s history. The starting gun for investment banker sales pitches will go off when Spencer finishes hiving off the voice brokerage unit.

“I get a lot of questions about ICAP as a possible target for exchanges,” said Niki Beattie, head of Market Structure Partners, which advises brokers and exchanges. “If the LSE deal doesn’t go ahead, people think there will be a lot of interest in ICAP.”

While a combined LSE and Deutsche Boerse may struggle to digest another company so quickly, analysts aren’t ruling out the possibility that the combined giant would try to snatch up NEX. And should the LSE deal collapse, a NEX acquisition could provide a growth strategy for either the Frankfurt- or London-based exchanges.

ICAP and LSE have flirted before. After exploratory merger talks with LSE ended in 2006, Spencer said he favored a “British solution” amid speculation that Nasdaq Inc. would try to buy London’s flagship stock market operator.

NEX’s specialties -- running electronic markets and what it describes as post-trade, risk and information services -- generated about $175 million in profit in its last fiscal year. Regulations demanding higher capital requirements have in some cases made trading more expensive, and services designed to ease that capital burden are seen as increasingly attractive for exchange operators. ICAP’s post-trade division had a 40 percent operating profit margin.

“We are focused on long-term strategic initiatives,” Spencer said after first quarter results. “We aim to become the world’s leading electronic platform for over-the-counter transactions and provider of post-trade risk mitigation services.”

That long-term approach includes investing in financial technology startups through Euclid Opportunities, which was founded in 2011.

The company faces challenges: trading volumes on its electronic platforms have suffered from growing competition and central-bank policy that has sapped volatility. ICAP’s currency market had average daily volume of $68.4 billion last month, the lowest level since at least 2006. Its Treasury venue had $142 billion, the lowest since Nov. 2014.

Despite subdued trading, currency platforms have been in hot demand. Deutsche Boerse and Bats Global Markets Inc. spent more than $1 billion on such businesses last year.

Morgan Stanley, Numis Corp. and Shore Capital Group have said ICAP may well be the next industry target after it completes its deal with Tullett Prebon Plc, which is buying ICAP’s name and 1,400-broker workforce for about $1.5 billion.

ICAP has a market value of about $4 billion, signaling that bigger potential acquirers could easily swallow it up. ICE, based in Atlanta, has a market capitalization of $33.6 billion and Hong Kong Exchanges & Clearing Ltd. is a $32.5 billion titan.

“They are attractive as an acquisition, given it’s going to be pretty small in terms of market cap relative to the big, global exchanges,” said Martin Price, an analyst at Credit Suisse. “It’s almost a bolt-on deal for ICE or a combined LSE-Deutsche Boerse Group. You could strip quite a bit of the cost out.”