FRANKFURT/NEW YORK (Reuters) - German exchange operator Deutsche Boerse (DB1Gn.DE) will buy fast growing U.S. options market International Securities Exchange ISE.N for $2.8 billion, creating the No. 1 transatlantic derivatives marketplace, the companies said on Monday.
Deutsche Boerse has been eager to extend its reach beyond Germany, especially in derivatives. It stepped up its search for scale after being rebuffed last year by pan-European bourse Euronext, which merged with the New York Stock Exchange instead.
The deal values New York-based ISE, the largest U.S. equity options market, at $67.50 a share, a nearly 50 percent premium to its closing share price of $45.72 on Friday.
ISE will operate as a separate entity under U.S. regulation and under the ISE brand, Deutsche Boerse said. ISE management intend to remain in their positions, it added.
Deutsche Boerse said it would contribute 85 percent of the total purchase price, with Eurex partner SWX Swiss Exchange contributing the rest.
Investment bank JPMorgan advised the Frankfurt exchange on the deal, which would use funds that big hedge fund investors had pressed Deutsche Boerse to distribute to shareholders.
Financial exchanges have been consolidating to diversify their businesses and cut costs. Options markets have become particularly attractive as the trading of listed options is growing faster than both stock and futures trading.
Analysts saw the $67.50-per-share price for ISE as rich, reflecting Deutsche Boerse’s eagerness to do a deal, even at the risk of disappointing shareholders hoping for a special dividend following the German group’s unsuccessful forays abroad last year.
“This is a huge number, especially for ISE,” said Richard Herr, exchange analyst at Keefe Bruyette & Woods. “Deutsche Boerse may want to deliver a knock-out bid after failing with Euronext. This price overwhelms any cultural issues.”
ISE shares were trading at about 37 times projected 2007 earnings on Monday, according to Reuters Knowledge, roughly inline with exchanges like NYSE Euronext NYX.N and IntercontinentalExchange (ICE.N) but well above the Nasdaq Stock Market (NDAQ.O), which trades at a multiple of about 24.
Shares of ISE, which also operates a U.S. stock exchange, jumped more than 45 percent to hit a record of $66.65 in afternoon trade on the NYSE.
Deutsche Boerse shares were 1.4 percent higher before trading in the stock was suspended.
Deutsche Boerse said its management board had recommended the deal to its supervisory board, which was meeting on Monday.
Deutsche Boerse last month unveiled a management revamp seen by analysts as a step toward a new legal structure that could free up as much as 2 billion euros ($2.72 billion) for distribution to shareholders through dividends and buybacks.
“This should pull out the rug from under that,” said MM Warburg analyst Andreas Praesier.
ISE was seen as a potential takeover target after Nasdaq approached the Philadelphia Stock Exchange, the No. 3 U.S. options marketplace, about a deal this month.
“ISE is facing more competition,” Herr said. “Given the challenges, they should not walk away from such a premium.”
He added that NYSE might be tempted to make a counterbid for ISE, which would likely prompt a sequel to last year’s transatlantic bidding war over Euronext.
“NYSE has talked about wanting to be bigger in U.S. derivatives and ISE is certainly one of the more attractive properties,” Herr said. “NYSE also has the currency to outbid the Deutsche Boerse group with a much higher multiple.”
Reuters data show Deutsche Boerse trades at about 23 times estimated 2007 earnings, compared to a multiple of 35 for the NYSE.
Additional reporting by Jessica Hall in Philadelphia, and Andreas Framke and Kirsti Knolle in Frankfurt