IPO Lifeboat May Float Philly Stock Exchange

A major seat holder says an IPO could provide much-needed cash, and thinks the struggling exchange could be valued at $300 million.
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According to the

Philadelphia Stock Exchange's

most prominent seat holder, the exchange truly needs to go public if it is going to survive -- and time may be running out for a big splash.

Paul Liang, who owns 83 of the Philly's 505 seats, contends the regional exchange needs to be the first U.S. exchange to sell shares in an initial public offering. And in a letter to the exchange recently, he wagers it could fetch $300 million in the process. The PHLX, though, isn't alone: the

New York Stock Exchange

,

Nasdaq-AMEX

and

Pacific Exchange

exchanges are all mulling public offerings.

For the PHLX, the smallest of the nation's four options exchanges, an IPO could get it out of several predicaments, chief among them financial pressures, a changing electronic marketplace and scrutiny from regulators. Bigger rivals such as the

Chicago Board Options Exchange

can simply outspend the PHLX. Potentially more efficient electronic rivals such as the

International Securities Exchange

are on the way. And regulators are pushing for changes in the options market, such as the multiple listing of options like

Dell

(DELL) - Get Report

, which only trades on the Philly.

Things are so tight at the Philly these days that it asked the city of Philadelphia for money, according to

Bloomberg

. But the board decided it didn't want a big debt load and rejected the loan, according to two people familiar with the decision.

Meanwhile, seat owners such as Liang may back an IPO as a way to turn their holdings into equity. They're already fretting over a possible plan by the PHLX to cap the rents they can charge, according to two executives with market-making firms in Philadelphia.

"If there was a reasonable IPO plan, people would consider it," says Meyer "Sandy" Frucher, the PHLX's chairman. "The trick right now would be to find investors." Frucher was in Chicago this week where he was set to meet with Liang. Frucher declined to comment on specifics of a possible rent cap, the city's loan offer or the timing of an IPO announcement.

An official at a competing exchange has similar concerns for a Philly IPO. "Who'd buy the shares if the prospects for the PHLX seem dismal?"

The Philly first may look to its seat owners for money. Deep-pocketed investors such as Liang buy up seats and charge traders or firms monthly rent. They charge a fixed rent -- about 2.25% of the seat price -- which fluctuates with the seat price. But the exchange is largely left out of this.

Frucher has proposed capping seat owners' portion of that rent at 2% and taking the remainder as a sort of tax revenue, according to the market makers. If that doesn't fly, an IPO could give seat holders equity that could be valued on the open market.

By Liang's estimate, the PHLX could sell shares at a "conservative" 10 times its annual seat rental revenue of $30 million. That math not only is convenient -- 30 million shares sold at $10 a share, the Chicago-based Liang says -- but also it values the PHLX cheaply compared with the

Australian Stock Exchange, which now trades at a 31 multiple and boasts a market capitalization of $1.5 billion. The Australian exchange was among the first to go public and is considered as a model for how a member-owned organization can proceed with an IPO.

Liang contends that everyone would benefit from the PHLX's conversion to a for-profit company and a publicly traded entity.

Of course, he would as well. As the controller of the most seats, Liang would be entitled to 16% of the PHLX's equity based strictly on the percentage of seats owned. "I'd actually be willing to be diluted" down to 8% equity, he says. Under his plan, a seat owner would be offered $300,000 per seat, either in stock or cash. With 83 seats to his name, Liang, who also owns seats on the

Pacific Stock Exchange

and

Chicago Board Options Exchange

, among others, would reap a fortune.

After the PHLX's proposed

merger with the then-unmarried

American Stock Exchange

fell apart earlier this year, Frucher has alternately tried to pitch the exchange for sale to the NYSE.

But the PHLX could be racing several other horses to the IPO market. The

Chicago Mercantile Exchange

, currently owned by its 3,000 members, said last summer it wanted to be the first large U.S. stock or futures market to transform itself into a for-profit operation. The NYSE and Nasdaq also are considering IPOs, according to published reports.

And the Pacific Exchange is floating the idea of turning its equity trading floor into a separate entity with its own self-regulatory status. A proposal is being sent to members by the end of July and voted on at the end of August. Rather than seats, traders would purchase permits to do business on the equity exchange.

If approved, the P-Coast, which also has a much more lucrative options exchange, would then file the plan for the

SEC

review and possibly seek outside financing or take the exchange public, a spokesman says.