Hedge Fund Loves the NYSE

With 9.4 million shares, activist manager Atticus Capital brings a penchant for drama to the table.
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Updated from 1:15 p.m. EDT

While most of Wall Street was cashing out of the

NYSE Group

(NYX)

last week, someone else was buying in.

Atticus Capital, a hedge fund known for its occasionally bare-knuckled activism, disclosed in a federal filing that it now owns 9.41 million NYSE Group shares -- likely making it the Big Board's largest single shareholder. The stake comes out to roughly 6% of the NYSE's outstanding stock and is worth $688 million at Monday's quote.

Shares of the NYSE have been on a hard-to-explain tear since underwriters priced a 25 million-share secondary offering Thursday night. In the deal, seatholders, exchange executives and many of Wall Street's biggest banks unleashed a huge chunk of previously unregistered stock into the public market, raising $1.5 billion for their own accounts.

Secondary offerings do not usually drive up share prices. In the NYSE's case, the stock's 9% rally Friday was attributed to everything from short-covering to relief that the deal was consummated. With the offering complete, the theory goes, CEO John Thain is now free to pursue an aggressive global expansion plan.

Several traders spoken to for this article said disclosure of the Atticus stake could also help explain the shares' strength.

Expansion has been a subject much on the mind of Atticus Capital, which last year gained fame helping to prevent the Deutsche Borse from going through with plans to acquire the London Stock Exchange. The German market's CEO lost his job in the dustup. Since then, Atticus has promoted a plan in which the Deutsche Borse would unite with Euronext, another European exchange operator. The hedge fund owns small chunks of each.

Atticus owned less than 5% of the NYSE's shares prior to last week's secondary offering. Most of them were converted shares of Archipelago Holdings, the electronic stock network with which the NYSE merged in early March. Atticus held 12% of Archipelago prior to the NYSE merger, a percentage stake that fell due to the shares issued in that transaction.

An Atticus spokesman told the

TheStreet.com

Monday that that the fund is "an investor and believer in the global exchange sector." With respect to the NYSE, the spokesman said, Atticus believes the "market underestimated the company's earnings power and the long term franchise value."

The fund is making a big bet on the NYSE. At its current value, the NYSE stake is the third largest investment Atticus owns, going by the company's last 13-F filing with the

SEC

, which covered Dec. 31, 2005.

The NYSE's recent gain -- it's up another $5.02, or 7.3%, to $73.62 Monday -- is nettlesome to the stock's many shorts. At $61.50 a share, Thursday's secondary priced at 28 times the 2007 Thomson First Call earnings estimate; it's up more than 200% over the last 12 months, including a period when the shares traded as Archipelago.

About 11 million NYSE Group shares were sold short as of April 10, the last date for which data is available. That was up from 9.05 million a month before.

Now the market is asking questions. Does Atticus believe in the fundamentals of the stock? Is Atticus is positioning itself to make a windfall from an acquisition play? Or could Atticus be preparing to block the NYSE from a big global expansion.

The question is significant because the NYSE and its competitor, the

Nasdaq

I:IXIC

, are both viewed as potential suitors for several European stock markets, most notably the London Stock Exchange.

While hopes for a transatlantic deal have clearly driven gains in both companies' shares, not everyone has expressed unqualified support.

"In America we tend to think more is better," said NYSE shareholder Thomas Caldwell, of Caldwell Asset Management, in a recent interview with

TheStreet.com

. "Everyone is getting caught up in the run to Europe, but it might be better

for the NYSE to arrange alliances with Deutsche Borse or Euronext than do an acquisition."

Besides liking the exchange business model, Atticus has historically taken a keen interest in companies with low leverage -- a quality that both the Deutsche Borse and the NYSE possess. In the past, Atticus has urged management at companies like

Phelps Dodge

(PD) - Get Report

to use excess cash to buy back public shares, often suggesting that management issue debt to do so. Such a tactic recently led to a public battle with the mining company.