Intercontinental Exchange Inc; Market cap: $28.1bn (as of 31/10/15)
Interactive Data Company; Market Cap: N.A.
About the deal
The US exchanges operator Intercontinental Exchange Inc (ICE) announced on Monday the intention to buy financial data firm Interactive Data Corp (IDC) in a deal worth $5.2bn, which will aggressively boost ICE’s access to fixed-income pricing data, challenging the domain of the big investment banks.
ICE’s shares closed on Friday at $252.40, slightly above Monday’s opening price of $247.39 but lower than Thursday’s peak of $261.84. We believe these fluctuations are linked with the uncertainty surrounding IDC’s growth perspectives, in the unlikely event that they will hamper ICE’sskyrocketing growth.
This does not look like a bad deal for ICE. Most importantly because it allows the company to reduce the 60 %share of the revenue it earns from volume-based businesses, such as trading revenues from the NYSE. Adding IDC will increase the contribution to revenue from market data and services, which is a much more stable business, to 40% reducing uncertainty on future cash-flows with a positive impact on valuation. Furthermore, the acquisition will make ICE the largest exchange operator by revenues, as well as the third-largest financial market data provider behind Bloomberg and Thomson Reuters.
Interactive Data provides analytics and reference data for banks and hedge funds for hard-to-value off-exchange financial instruments. With more than 2,400 employees around the world, IDC is very competitive with regards to valuation of fixed income securities, but its offering structure comprises a wider range of services: global reference data and listed markets pricing services, ultra-low latency data and trading infrastructure services, sophisticated analytical tools for investment managers and customized web-based financial information systems.
Some analysts bear doubts regarding the brightness of the company’s future, considering that IDC’s revenues have grown “only” about 28% since Silver Lake Partners and Warburg Pincus took the company private in 2010. This is quite alarming if we consider that IDC operates in a sector which is not particularly big in size, c.$26.5bn revenues. It is clearly dominated by two big players, Bloomberg and Thomson Reuters, with market shares by revenues of 32 and 26% respectively, and where a third participant, FactSet, is already struggling to position competitively despite a 56% growth shown in the period 2010-2015.
LTM revenues for IDC are expected to be $945m and LTM adjusted EBITDA was $378m.
Intercontinental Exchange Inc. is an American network of exchanges and clearing houses for financial and commodity markets. ICE owns and operates 23 regulated exchanges and marketplaces among which: futures exchanges in the US, Canada and Europe, New York Stock Exchange, Equity options exchanges, OTC energy, credit and equity markets. ICE also owns and operates 5 central clearing houses; ICE Clear Europe, ICE Clear U.S., ICE Clear Canada, ICE Clear Credit, and The Clearing Corporation. Headquartered in Atlanta, Georgia, ICE has offices all over the world: New York, London, Chicago, Amsterdam, San Francisco, Singapore and many others.
The company is quite familiar with the M&A process having built (in 15 years) a $27.5bn empire through an inorganic-growth strategy based on a series of acquisitions and partnerships, just to mention a few: International Petroleum Exchange was bought in 2001, the New York Board of Trade in 2007, the Climate Exchange in 2010, NYSE Euronext in December 2012 for $8.2bn and another financial data firm, SuperDerivatives, for $350m.
ICE is experiencing a period of very positive results, and has been growing rapidly lately. On Wednesday, the company released third-quarter results confirming the positive expectations. It reported adjusted earnings of $2.91 a share, up 24% YoY, with its listing business growing at 12% and its data services climbing at a resounding 26%, on a yearly basis.
ICE is also known for setting the price of Brent crude oil and for taking responsibility for running Libor after regulators accused traders of attempting to rig the benchmark.
What happened in 2010 when IDC was taken private?
Warburg Pincus and Silver Lake acquired the company in 2010, giving it an enterprise value of $3.4bn, in what was one of the biggest leveraged buyouts of 2010. Before the buyout IDC was controlled by Pearson PLC (61% stake), the owner of Financial Times, which received $2bn. Silver Lake currently owns about 41% of the company while Warburg Pincus owns about 37%. The two private equity companies acquired IDC because they anticipated the growing importance of data business, especially in the financial world. Moreover, IDC’s high percentage of recurring revenue from subscriptions was also an important factor for the PEs. Since the acquisition, Silver Lake and Warburg Pincus have invested about $100m in improving the company’s technological platform which included upgrading IDC’s servers and offering new products, such as more sophisticated intraday pricing. Since the buyout, the PEs managed to increase the company’s revenue which reached $939.2 million last year, up 8% from 2011. Moreover, IDC had total debt outstanding of $2.2bn and cash of $320m at the end of last year. Earlier this year, the two private equity firms reported that they were exploring an outright sale of IDC as well as its IPO, the process known as “dual-track”. IDC then filed for an initial public offering in October seeking to be valued at more than $5bn and in order to reduce its debt burden. Moreover, it also received takeover interest from other companies such as Nasdaq OMX and Markit. This being said, Silver Lake and Warburg Pincus expect to reap a return of about 2.5x to 3x their original investment.
Why go for a dual-track IPO/M&A process?
A dual-track means running an M&A sale track alongside an IPO track. That often requires bringing on two legal teams of mergers and acquisitions attorneys and securities lawyers which makes the process more expensive. The owner company (in this case the PEs) has to make a final decision on its preferred exit strategy late in the process, giving itself time to maximize the proceeds. Basically, this process allows the company to see what kind of pricing it can get in both the private and public market and compare the two. Furthermore, by announcing a potential IPO, a company puts itself in the spotlight and signals that it is for sale. As the strategic bidders are aware of the ticking clock, they might rush to place their bids in which can create price competition and boost the sale price. Also, since the owner companies are not entirely reliant on the potential bidders, the transaction itself is less uncertain.
An important thing to note is that the previous two months have not been easy on the IPO markets, making it more difficult for the financial buyers to raise as much money as they would hope for by choosing this exit strategy. In recent weeks a number of IPOs were postponed or when they went through they were priced below the midpoint of an expected range, such as the IPO of First Data.
Deal Structure and Rationale
ICE will pay $3.65bn in cash and $1.55bn in its own shares to buy the firm from Silver Lake and Warburg Pincus, according to a statement on Monday. ICE will issue 6.5 million common shares, and up to 2.2 million additional shares based on a sliding scale from $179.07 to $238.76 per share in the event that ICE’s weighted average stock price over a specified period leading up to closing is less than $238.76. It will finance the cash portion with debt provided by Wells Fargo, National Association and Bank of America Merrill Lynch. It will not assume IDC’s debt which is to be repaid by using the deal proceeds, nevertheless the process will double its debt burden. Capital return to shareholders will continue via dividend payments.
With the last two acquisitions (SuperDerivatives and IDC) ICE has completed the process of re-shaping its revenue structure, its market data service revenues have risen from about $100m in 2010 to an expected $700m this year, and now account for 40%of ICE’s top line, while its traditional, or better original, business has shrunk to less than 60%. This change will imply more stable cash flows, considering that IDC’s subscription-based model has brought 98% recurring revenues in each of the years from 2011 to 2014. Indeed, the type of service that IDC provides is a good add-on to ICE’s businesses in clearing and trading credit-default swaps.
Despite ICE’s successful history of acquisitions, some analysts expressed their doubts on ICE’s latest bet, pointing out the target’s margins as a potential red flag. As a matter of fact, IDC’s EBITDA margin stands at 35-40%, which is lower than the margins of the other data businesses (Thomson Reuters Corp and Bloomberg LP are its competitors) and way below ICE’s existing data business’ margin of above 75%. That may partly explain why ICE is paying an enterprise value of 13.5 times EBITDA (over the past 12 months) for Interactive Data while FactSet currently trades at about 20 times its comparable earnings.
Notwithstanding these numbers, the company expects the deal to be accretive from the first year after closing (2016) by increasing the company’s adjusted EPS by about 5% (excluding deal-related amortization). Moreover, it expects cost synergies of $150m to be fully achieved within three years (from 25% to be realized in the first year of closing up to 90% by the end of the third year). The synergies include corporate expenses ($40m) and operational efficiencies ($100m).
We believe the deal would benefit both companies, providing ICE with opportunities to leverage its global platform but also accelerating IDC’s growth which is surely not that impressive (with revenues rising in the 2-3% YoY range over the last several years).
The Market Data Service Industry – The New Jungle
Nowadays the financial data service sector has become extremely important within the economy (global spending reached $26.5bn last year) and its importance will grow in the future as we move towards an increasingly computer-based economy. Even though it seems that the industry has a positive perspective, few big giants already dominate the industry. This means that competition is pushing the companies in the industry to increase their size to combat a decreasing-fee trend, which might hamper their profits.
This has brought these companies in the M&A market with a growing appetite that has led to a number of large deals in the sector, such as: Markit’s $1.3bn flotation, Verisk Analytics’ £2.8bn purchase of Wood Mackenzie, the $700m sale of Dealogic late last year to private equity, the purchase of Russell Investments by London Stock Exchange for $2.7bn in 2014 (and also its previous acquisition of Borsa Italiana in 2007 for £1.7bn) and ICE’s acquisition of NYSE in 2013.
It looks like we have found another industry where M&A activity has rebounded significantly and has no intention of vanishing, although the average deal size is pretty small as compared to pharma, tech or oil & gas, the increasing importance that the data business will obtain in the future will have important effects on the valuation of companies that deal with this kind of information and make them available to the general public. Can this sector finally change the, almost boring, rank we usually see in the league tables?
Broadhaven Capital Partners, Wells Fargo and the law firms Sullivan & Cromwell and Potter Anderson & Corroon advised ICE.
IDC was advised by Goldman Sachs, Credit Suisse and Simpson Thacher & Bartlett.
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