ICAP Moves Centre Stage

By Jake Pugh

Brilliant hand played by Howard Lutnik

• It’s a new week so it must be time for another ICE acquisition
• CME made to look out of touch and increasingly a domestic only market – so it’s lucky they run a US monopoly
• ICAP in play – £8 exit? but it could get expensive for Tulletts; whither Trads?
• Dirty data deeds abound

As predicted in previous missives, Investment bank FICC businesses are in semi-freefall. Most market participants opined that regulatory actions are leading to unintended consequences, but that’s the wrong read – post Lehman, Jez it’s democratic politics. The hypocrisy of those in the markets is nothing short of remarkable – there’s no issue when the coal mines need to be closed or thew Detroit metal bashers restructured but when financial services needs to contract/be re-engineered that’s a different matter…so much for free markets.

But there’s more pain to come for the FICC businesses as capital requirements and mandatory clearing really bites and there remains a great opportunity for the prop shops to fill the institutional liquidity gap.

Electronic trading and central clearing isn’t ‘more expensive’. It’s a bit like saying driving without car insurance is cheaper… well, yes it is in one sense, but one could say the price doesn’t adequately reflect all the risks.

And also as forecast the reg reform agenda is leading to the re-rating and reconfiguration of market infrastructure assets that enable electronic trading, data transparency, index product development, risk analytics, valuations and central clearing.

The CME 800lb gorilla has now been displaced by the 1,000lb gorilla that is ICE. With the acquisition of Trayport – ICE has again shown that their ability to move at speed, leverage their paper and combine international assets is unparalleled.

This is in stark contrast to the slow moving CME which has been made to look somewhat silly by BGC. Does anyone know who runs the CME? Well it can’t be Gill so maybe it’s Terry Duffy or perhaps it’s the politburo-like Board. Anyway they’ve been made to look like numpties by the Trayport deal so I guess CME may focus on the only credible deal that’s left – ICAP, but it could get messy for Tulletts…

Here’s how I see the numbers: at 500p, ICAP mkt cap is £3.25bn and with the v-business going to Tulletts for around 1.3x revenue (~£1.1bn) this implies the e-businesses of ICAP Newco (EBS/Brokertec, Tripotima, Traiana, Reset, Euclid etc) is worth £2.15bn which is just 4.9x revenues of £440m, so a significant discount to the implied value of Trayport.

So an equally brilliant hand played by Michael (surely he and Howard haven’t buddied up?!) and we should see a fundamental re-rating of the ICAP e-business given that wee Trayport has just gone for x8 revenues. There’s an opportunity for a big player to acquire the whole of ICAP and do a reverse BGC, i.e. keep the e-businesses and sell the v-businesses especially as the value of the v-business is largely underwritten by Tulletts. Phiz may have to sharpen the pencil on synergies though given that Howard has bought the GFI v-broking business (plus Fenics) for 0.16x revenues versus his 1.3x purchase. Ouch.

A world of two big v-brokers (BGC and Tullett/ICAP) doesn’t augur well for Trads but there may be an opportunity to create a new broker in combination with a futures specialist and of course there’s the excellent team at Trad-X which offers value.

ICAP exit price? x8 for the e-biz + £1.25bn for the v-biz plus a premium for scale = around £4.8 bn, let’s call it £5bn amongst friends so a deal around £7.50 or £8 is realistic and a 50% premium to the current price.

Potential buyers for ICAP? A small number of the big players:

• CME – great alignment with Treasuries, FX and clearing / risk reduction services and their London CCP
• HKEx – a second major London asset to totally diversify the Group
• LSE – the only remaining London player, natural links with LCH and finally the rates business they crave
• DB1 – new CEO and a play to finally get meaningfully beyond the boundaries of Frankfurt
• …and I guess you can never discount ICE of course…

In due course I will revert on the futures prop shop model and how the spoofing saga is going to cause light to be cast on some of the more nefarious models (specifically around client money and employers NI) but that’s for another day.

Sage voices in the futures market are noticing that the data policies of CME and ICE represent egregious profiteering, not least because the prop shops who create much of the underlying liquidity and data are having to buy back the data from the exchanges at punitively high fees. No good will come of this because the exchanges are biting the hand that feeds them by pricing out new traders and new liquidity on their platforms.