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NYSE, ICE Deal About Everything but Stocks

NEW YORK ( TheStreet) - IntercontinentalExchange (ICE - Get Report) has offered to buy NYSE Euronext (NYX) for $33.12 a share, in a deal that may test whether antitrust regulators allow for the consolidation of financial exchanges after blocking a previous ICE bid for NYSE Euronext, and the exchange's proposed merger with Deutsche Boerse of Germany earlier in 2012.

The terms rebut speculation an acquirer of NYSE Euronext would have zero interest in NYSE's U.S. stock exchange business amid unrelenting market share losses. But while the deal's structure appears bullish on U.S. equity markets, in the long run, the prospective merger still may have little to do with NYSE's iconic big board and its equity exchange that traces back to 1792.

In a statement released on Thursday morning, ICE said it will pay $33.12 a share for NYSE Euronext, in a deal that values the exchange operator at $8.2 billion and is roughly a 37% premium to Wednesday closing share prices.

The deal will be financed with a mix of roughly 67% stock and 33% cash, a press release states. That is contrary to previous reports that a merger would be mostly debt financed.

As part of the deal, ICE said it would explore the possibility of listing Euronext on European markets, if regulators were to support the proposed transaction. [NYSE merged with Euronext in 2006].

ICE's statement of the merger also rebuts analyst speculation about how a deal could pass investor and regulatory muster.

"ICE is committed to preserving the NYSE Euronext brand. ICE will maintain dual headquarters in Atlanta and New York. New York headquarters will be located in the Wall Street building, home to the iconic trading floor. ICE will also open a new midtown Manhattan office in June 2013," the press release reads.

On a conference call with analysts, ICE management said Euronext was "massively undervalued," and could benefit from a E.U.-based listing as markets in the region recover from a debt crisis. ICE also said that a tour of global regulators was "very well received," and that the proposed merger would "get a lot of support in the market," referring to antitrust officials. This time ICE is going about a NYSE bid alone, which could make a difference for antitrust regulators who balked at a consolidation of the two biggest U.S. stock exchanges in ICE's previous joint bid with Nasdaq.

Meanwhile, NYSE management stressed on the call that the company's combined international stock, derivatives and technology businesses had failed to gain investor confidence, driving the company to Thursday's merger. "We have yet to deliver those returns," NYSE said.

While analysts say the prospect of tie-up is higher than in 2011, when multiple exchange deals were nixed by regulators, their belief going into the announcement of a deal was that ICE may have little interest in NYSE's stock trading businesses.

Instead, analysts said ICE is more interested in acquiring NYSE's Liffe derivatives unit, which is a powerhouse in interest rate future's trading and could complement ICE's specialty in the clearing of highly lucrative swap products like interest rate and credit derivatives.

ICE's acquisition highlighted by the Liffe futures franchise makes sound strategic sense and comes as no surprise given management's track record," wrote Credit Suisse analyst Howard Chen, in a note to clients. Still, Chen expressed concern that the commodity and derivatives powerhouse could see its earnings diluted by NYSE's slow growth equities businesses.

"[We] would like to see a more concrete pathway to exiting some of NYSE Euronext's less defensible and slower growth businesses (cash equities, technology, listings)," Chen added, while expressing confidence that the deal would be additive to ICE's earnings as management indicated in announcing the deal.

"The rationale for the deal lies in Europe," wrote Berenberg Bank analyst Richard Perrott, in a note released to clients before the deal's terms were announced.

"Putting ICE and Liffe together would create a major London-based derivatives exchange, specializing in interest rates, commodities and credit. Liffe would shift to using ICE's existing clearing services, removing the need for NYSE Euronext to pursue its own [central counterparty clearing house] build-out," wrote Perrott.

While NYSE has some U.S. based interest rate swap clearing businesses, they suffer from a lack of access to a central clearinghouse now mandated by Dodd Frank Act derivative reforms and would benefit from Atlanta-based ICE's strength in European fixed income derivative trading and clearing.

Ultimately, ICE's position in swap clearing could benefit from NYSE's futures clearing platform and vice versa, while also diversifying combined operations regionally without much overlap.

NYSE Euronext shares surged over 34% to $32.25 in Thursday trading, while ICE shares rose 1.4% to $130.10, erasing pre-market stock gains in excess of 5% before terms of the deal were formally announced.
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