Electronic trading platform NEX (NXG) shares have soared by 31.8% to 883.5p after confirming that US-based CME has approached it regarding a takeover.
The $56bn futures trading exchange giant CME has made a ‘preliminary’ bid for the FTSE 250 company, which shareholders must be hoping will spark a race among global exchanges to acquire the business.
NEX, formally known as ICAP, has been the subject of takeover speculation since it disposed of its global broking business in December 2016. This sparked a decline in the London financial technology company’s fortunes, including the loss of senior staff such as its chief financial officer in May last year and a profit warning last October.
The warning concerned its post-trade division, which processes millions of deals in fixed income, derivatives and equities markets. The head of the division, which accounts for around half of the company’s profits, Jenny Knott, left shortly after the profit warning was announced.
Paul McGinnis, analyst at Shore Capital Markets, has ‘continually struggled with the economics [of a deal] from the viewpoint of an acquirer’. He says the return on investment for a bidder would be just 3.3% based on his forecasts.
This is by no means a done deal, NEX notes that ‘discussions are at an early stage and there can be no certainty that an offer for NEX will be made, nor as to the terms of any offer, if made’.
WHAT THE DEAL MEANS
If CME did acquire NEX, it would bolster the US company’s position for trading in US Treasuries. CME has a strong position trading futures in US government debt. NEX’s division BrokerTec, now called NEX Markets, complements this as one of the largest electronic fixed income trading platforms in the world.
Both companies are also involved in foreign exchange trades, although have a significantly lower market share of a business that sees over $5trn traded every day.
McGinnis is unequivocal in his view of a potential deal, saying that NEX’s board ‘should lock CME representatives in the room until they table an offer’.
His reason is that he thinks NEX’s own targets are ‘stretching’. The company wants to grow revenues by 7% to 10% a year and improve operating margins to over 40% despite it being around 25% in the current year.
He thinks NEX shareholders should accept a deal even at no premium, as they will be getting paid for the delivery of what appears to be an unrealistic three year strategy ‘thus removing considerable execution risk’.
Shore Capital has a ‘sell’ recommendation on NEX with a target price of 490p, given the share price appreciation on Friday, McGinnis seems unconcerned about the business merits of the potential deal. He says ‘just because it is hard to make an economic case for an acquisition to create value hasn’t historically proved a big enough barrier to it actually happening’.
In November 2017 NEX’s share price was hurt by extra spending in preparation for this January’s implementation of the EC Directive MiFID II (the updated Markets in Financial Markets Directive) which resulted in a worsening of margins.
