Nasdaq, NYSE Not Dead as $1.3 Billion More Looming: Real M&A

Friday, 15 Apr 2011 10:32 AM

 

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Nasdaq OMX Group Inc. may be able to add about $1.3 billion in cash to its bid for NYSE Euronext, according to borrowing levels for its previous acquisitions.

Nasdaq OMX could increase the $42.88 a share offer it made with IntercontinentalExchange Inc. by about $5.10 before its ratio of debt to earnings before interest, taxes, depreciation and amortization matched the weighted average level of previous takeovers, according to data compiled by Bloomberg, Sandler O’Neill & Partners LP and the New York-based company. Lenders have already pledged $2.1 billion.

Borrowing the additional amount would put the company’s investment-grade credit rating in jeopardy, a risk it may be willing to bear to beat Deutsche Boerse AG of Frankfurt in bidding for the New York Stock Exchange owner, Macquarie Group Ltd. said. NYSE Euronext is weighing its own incentives for shareholders after rejecting Nasdaq OMX and ICE’s offer even though it’s valued 16 percent higher than Deutsche Boerse’s.

Nasdaq OMX has “typically taken on a lot of debt and created companies that produce more cash flows, and paid those debt levels down quickly,” said Ed Ditmire, an exchange analyst at Macquarie in New York. “They have a relatively flexible approach to what is the right credit rating for them.”

Standard & Poor’s has a long-term credit rating for Nasdaq OMX of BBB, the second-lowest investment grade ranking, and placed it under review on April 1. Nasdaq OMX said in an April 10 statement that it is focused on staying out of junk status. Adding $1.3 billion would take leverage above a level that Chief Executive Officer Robert Greifeld considers ideal, according to a Sept. 22 earnings call.

Speculative Grade

The owner of the second-biggest U.S. stock exchange behind the NYSE may still be willing to accept a speculative-grade rating rather than lose the takeover battle, according to Patrick O’Shaughnessy, an exchange analyst at Raymond James Financial Inc. in Chicago. Boosting debt wouldn’t keep the acquisition from adding to earnings, he said.

“We don’t view a downgrade to junk as a deal-breaker,” O’Shaughnessy said. “The existence of so much variable rate debt will greatly limit Nasdaq’s strategic flexibility and make its earnings highly sensitive to a rising interest rate environment, but would not prevent the acquisition from being nicely accretive.”

Refinancing Costs

Nasdaq OMX projects it would owe $6.52 billion should it succeed with the bid, including NYSE Euronext’s debt and $2.1 billion in financing for the offer, according to an April 1 presentation. Nasdaq OMX may face additional refinancing costs because owners of NYSE Euronext’s $2.07 billion of fixed-rate bonds due in 2013 and 2015 can request immediate repayment should a takeover of the company result in a downgrade to below investment grade, according to the latest annual report.

Including $14.24 in cash, Nasdaq OMX and Atlanta-based ICE are offering $42.88 a share for NYSE Euronext, compared with Deutsche Boerse’s all-stock agreement valued at $37.10, based on prices at 4:14 p.m. New York time yesterday. NYSE Euronext shares climbed 1.7 percent to $38.90 yesterday.

Nasdaq OMX took on almost $1 billion in debt to buy the Inet electronic trading system in 2005, selling the rest of Instinet Group Inc. as part of the deal. That boosted debt to 6.55 times Ebitda. After the 2008 purchase of Stockholm-based OMX AB, the ratio reached 3.55. For Philadelphia Stock Exchange, it climbed to 3.91, data compiled by Bloomberg show.

Leverage Ratios

Without changing the amount of stock it is offering, dipping into cash or selling units, $1.3 billion in additional debt would push Nasdaq’s leverage to 4.36 times Ebitda, the weighted average of past deals. In the three transactions, Nasdaq OMX lowered the leverage ratio at least 20 percent within 18 months, according to data compiled by Bloomberg.

Frank De Maria, a spokesman for Nasdaq OMX, didn’t respond to two e-mails seeking comment. Richard Adamonis of NYSE Euronext and Naomi Kim of Deutsche Boerse declined to comment.

Nasdaq OMX and ICE have a total of $1.36 billion in unrestricted cash that they could contribute to a higher offer. As part of the April 1 bid, ICE’s leverage ratio would climb to a record 1.6, Bloomberg data show. The company could add almost $600 million to that to get to 2 times, NYSE Euronext’s long- term target. In the proposal, Nasdaq OMX would assume all of NYSE Euronext’s debt.

“We have a tremendous ability if we want to use debt,” ICE Chief Executive Officer Jeffrey Sprecher said in an April 1 interview, referring to debt beyond the amount already committed. ICE doesn’t have a debt rating, he noted.

Adding Debt

Kelly Loeffler, an ICE spokeswoman, said the $1.65 billion cash portion of ICE’s proposal would be financed with borrowed money. “We could maintain what bankers view as an investment grade rating with higher debt,” she said yesterday.

S&P cut Nasdaq OMX to junk from investment grade about five months after the Inet deal and left it there for almost two years. The company lowered its leverage ratio by 37 percent within 18 months of the deal’s close, Bloomberg data show. Nasdaq OMX’s long-term target debt level is 2 times Ebitda, with leeway to go up to 3.5 times for acquisition periods, according to the Sept. 22 earnings call.

The company said it aims for a 2.5 ratio within the same time frame for the NYSE Euronext transaction, according to an April 1 conference call following the bid announcement. Combined 2011 Ebitda would be $1.8 billion, according to Sandler O’Neill.

‘Substantial Cash Flow’

“We will use our substantial cash flow to rapidly de- lever, and as soon as we reach our target leverage ratio, which should be in 18 months, we will seek to reignite our capital return plans,” Greifeld, 53, said during the call.

Nasdaq OMX borrowed money in December to buy back 22.8 million shares from Borse Dubai Ltd. for about $497 million. The company owed $2.32 billion as of Dec. 31, with $733 million in unrestricted cash available, according to its presentations.

“We had already put them at a negative outlook back in December when they issued some debt to repurchase the shares from the Borse Dubai,” Charles Rauch, the primary credit analyst for Nasdaq OMX at S&P, which put Nasdaq OMX on credit watch negative following the bid, said in an interview. “They were already approaching the tolerance levels at that time.”

Rauch added that the credit-rating company will be reviewing the combined entity’s leverage and monitoring “the ability of this company on a combined basis to generate sufficient cash flow to pay down quickly.”

Takeover Exceptions

Companies in S&P’s BBB category had a three-year average leverage ratio of 2.3 times Ebitda, according to S&P data through 2009. The highest junk rated group had debt that averaged a level 3 times Ebitda.

“Companies are willing to go above their long-term normal targets for acquisitions,” said Michael Wong, a Chicago-based analyst at Morningstar Inc. Since Nasdaq OMX’s offer is still higher than Deutsche Boerse’s, “there’s no real reason why they should have to increase it. The caveat to that would be that they might, just to compensate for the possibility of higher execution risk and having to entice the shareholders,” he said.

Nasdaq OMX is counting on Greifeld’s history of cutting costs and integrating companies. Its bid includes 28 percent more expense reductions and synergies than the Deutsche Boerse deal, according to company statements. Both bidding groups have said their estimates are likely conservative.

Greifeld said in an April 10 statement that Nasdaq OMX and ICE have already received “very positive” responses from NYSE shareholders. NYSE Euronext and Deutsche Boerse are considering financial incentives to win support for their merger, four people with direct knowledge of the matter said this week.

‘Could Unfold’

No decisions have been made, according to the people, who declined to be identified because the discussions are private. If action is taken, it is unclear whether a special dividend or another form of payment would be made before or after the deal’s closing and which shareholders would get it.

Three people with direct knowledge of the matter said on April 11 that Deutsche Boerse, which needs 75 percent of its shareholders to vote in favor of the NYSE Euronext merger for it to go through, doesn’t plan to raise its offer.

Deutsche Boerse “appears reluctant to increase its bid for NYSE, which we believe could partly be driven by the higher shareholder hurdle,” Christopher Harris, a Baltimore-based analyst at Wells Fargo & Co., who said NYSE Euronext has the capacity to pay a special dividend of $1.50 a share, wrote in a report April 13. “While a special dividend by NYSE could appease certain shareholders, other strategic maneuvers by both sides could unfold in coming months.”

Overall, there have been 7,080 deals announced globally this year, totaling $701.1 billion, a 31 percent increase from the $535 billion in the same period in 2010, according to data compiled by Bloomberg.

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