Analyzing NYSE (NYX)

By Yaser Anwar, CSC of Equity Investment Ideas

• ON tuesday the majority of Euronext shareholders voted to approve the Euronext’s merger with the NYSE Group. Each Euronext share will be exchanged for 0.980 shares of a new company, NYSE Euronext, plus 21.32 euros approximately $28.13 in cash.
• NYX shares will each be exchanged for one full share of the new NYSE Euronext. One change from the original proposal is that the board of directors will consist of 11 Europeans and 11 Americans, rather than a majority of Americans.
• I believe the company has made solid progress in recent months on several fronts, including announcements for headcount reductions, reduction of floor exposure, price increases, and the removal of price caps.
• In addition, the roll out of Hybrid continues on track (to be completed by the end of December) and should enable incremental volume growth in 07 and 08. From the stock price it is clear that The Street’s confidence continues to grow in management’s ability to generate higher than initially expected cost savings as it integrates Archipelago and Euronext and further rationalizes its own business.
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• With Euronext shareholders approving the merger, I believe the regulatory hurdles won’t be much of a problem, if any at all. How so? Thanks to my prior formal email relationship with the GS analyst for this sector, he referenced an example to illustrate the point to me- "while the Dutch Finance Minister has not granted final approval, earlier this week, the NYSE released the text of a letter indicating that this approval is likely."
• Moving on to the recent changes in pricing NYX eliminated monthly fee cap of $750K for NYX listed trades, impacting 7 firms accounting for approximately half of the exchange’s total volume, the largest being NDAQ. In addition, NYX also increased its flat fee to $0.0275 from $0.0250/100 shares. Based on current volume, new pricing changes equate to approximately $6m in incremental monthly revenue.

According to ML- Near-term revenue upside is neutralized by new pricing/fee structure for specialist community that eliminates specialist commissions in favor of a new revenue sharing structure with the NYSE (along with modest fee breaks for specialists). Thus, the elimination of commissions paid directly by exchange users to specialists provides the NYSE with some measure of cover to institute price hikes without necessarily increasing costs to the end-user, at least immediately.

• The terms of the new pricing schedule the NYSE will provide specialists with $53m during a transitional period over the next six months before revenue sharing commences on June 1, 2007. If I understand correctly revenue sharing calculation is based on specialist participation and individual stock specialist market share, which makes precise calculation some what difficult.
• While Josh was a little skeptical about the current multiple, we agreed that with the success of the Euronext merger, NYX will definitely seek more acquisitions in options, derivatives and even foreign exchanges to fuel its growth.
• The Trade: If I was an institutional trader I would- short NDAQ debt & hedge myself with credit derivative swaps. Furthermore, put on a pair trade comprising of a long position in NYX & short NDAQ (70-30% short) with a couple of LEAPS on NYX and buy NDAQ 27.5 March puts. NDAQ will come under pressure to make a bid for LSE, now that NYX is successful with its merger. With the recent positions taken in LSE, by HFs, being higher than NDAQ bid, NDAQ will be forced to pay up. Furthermore, With its deteriorating debt (recent debt rating cuts vs. NYX hardly has any) NDAQ price will come under pressure, especially if we see a correction.

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