Deutsche Boerse Plans to Buy ISE for $2.8 Billion
By Nandini Sukumar and Edgar Ortega
April 30 (Bloomberg) -- Deutsche Boerse AG, operator of the Frankfurt stock exchange, agreed to buy International Securities Exchange Holdings Inc. for about $2.8 billion in cash to create the largest trans-Atlantic derivatives market.
The price amounts to $67.50 per ISE share, Deutsche Boerse said today, or 48 percent more than ISE's closing price of $45.72 on April 27. The purchase will be carried out by Deutsche Boerse's Eurex AG unit, Europe's largest derivatives exchange.
Buying New York-based ISE will give Deutsche Boerse access to the U.S. options market, which in 2006 grew at its fastest pace in six years as hedge funds and investors turned to derivatives to bolster returns. Deutsche Boerse Chief Executive Officer Reto Francioni has been seeking partners since losing out to NYSE Group Inc. in a battle to buy Euronext NV last year.
``This move will offer Deutsche Boerse an excellent foothold into the very rapidly expanding U.S. options market,'' said Brad Bailey, a former options and stock trader who's now an analyst at Boston-based consulting firm Aite Group LLC.
Shares of ISE, the second-largest U.S. options market, surged $20.97, or 46 percent, to $66.69 in composite trading on the New York Stock Exchange. Deutsche Boerse rose 2.35 euros, or 1.4 percent, to 172.55 euros in Frankfurt. Together the two exchanges would have a combined market value of $20 billion, just shy of the $22 billion market capitalization of NYSE Euronext.
Separate Exchange
ISE will operate as a separate exchange overseen by the U.S. Securities and Exchange Commission, and will retain its ``full management,'' current governance structure and brand, Deutsche Boerse said in a statement.
The transaction is expected to close in the fourth quarter, Deutsche Boerse said, adding that it will fund its 85 percent share of the purchase price with a bridge loan of about 1.5 billion euros and cash. Deutsche Boerse will change its legal structure to free up cash and will have net debt on its balance sheet after the transaction, the exchange said.
Deutsche Boerse expects savings before taxes of about $50 million per year with 50 percent of the reduction achievable in 2010.
The German exchange's offer for the seven-year-old ISE represents ``a staggering premium,'' said Michael Long, an analyst at Keefe, Bruyette & Woods Ltd. in London, who has a ``market perform'' rating on Deutsche Boerse shares. ``Deutsche Boerse has now opted for an acquisition to drive its U.S. strategy.''
NYSE Euronext Competition
Deutsche Boerse and the ISE are pursuing their plan after NYSE Euronext moved to generate $40 million a year in fees for options and futures trading by linking markets on both sides of the Atlantic. NYSE Euronext owns the Arca options market, which is the fourth largest in the U.S., and the London-based Euronext.Liffe derivatives market, which is Eurex's closest rival in Europe.
Options trading in the U.S. will grow at an annual rate of more than 28 percent this year and next, spurred by a government mandated test to quote some contracts in 1-cent increments instead of nickels and dimes, Fox-Pitt, Kelton Inc. analyst Ed Ditmire said in a report today. About 20 percent of the roughly 10 million contracts that change hands daily in the U.S. involve trades completed by European investors, according to a survey by the Options Clearing Corp., which guarantees all U.S. trades.
Philadelphia Deal
The Philadelphia Stock Exchange, the third largest U.S. options market, is also in talks about a possible deal with rivals including Nasdaq Stock Market Inc. Negotiations earlier this decade between the Philadelphia exchange and Eurex collapsed on concern U.S. regulators would reject the plan for the joint market.
``We are talking and have talked to a whole bunch of folks, and we are seriously looking at all our options,'' Sandy Frucher, chairman of the Philadelphia exchange, told reporters on April 27 at the Options Industry Council conference in San Antonio.
Exchanges have announced more than $60 billion of joint ventures and acquisitions since 2005 as they rush to provide investors the ability to trade securities across asset classes and time zones. Intercontinental Exchange Inc. has bid $9.6 billion for the Chicago Board of Trade based on closing share prices on April 27, compared with an $8.2 billion offer by the Chicago Mercantile Exchange.
Global trading in futures and options contracts on derivatives connected to interest rates, currencies and stock indexes totaled $465 trillion in the third quarter of 2006, up from $288 billion two years earlier, according to figures from the Basel, Switzerland-based Bank for International Settlements.
Hedge and Speculate
A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events or the price of underlying assets such as debt, equities and commodities. Companies and investors use them to hedge against, or speculate on, price changes.
Derivatives include futures, which are agreements to buy or sell assets at a set date and price, and options, which are the right but not the obligation to do so. The derivatives market is measured by the so-called notional value of the assets on which the contracts are based.
Deutsche Boerse was advised on the transaction by Deutsche Bank AG and JPMorgan Chase & Co., the exchange said. ISE was advised by Merrill Lynch & Co. and Evercore Partners, according to Molly McGregor a spokeswoman for the U.S. exchange.
Deutsche Boerse and the ISE will hold a press briefing in New York tomorrow at 8:30 a.m. local time, followed by a conference call for investors at 10:30 a.m. in New York. |
