After the successful acquisition of the Big Board — NYSE Euronext Inc. last week, IntercontinentalExchange Group Inc. (ICE) is now eyeing Asia with its announced intention to buy Singapore Mercantile Exchange (SMX). The all-cash deal worth $150 million is expected to culminate before the end of 2013, upon receipt of regulatory approvals.
Based out of Singapore, SMX is an over 3-year old futures exchange that is run under the flagship of Financial Technologies India Ltd. (FTIL) and is regulated by the Monetary Authority of Singapore (MAS). SMX trades through a diverse asset class, including metals, currencies, energy and agricultural commodities. Trading volumes of SMX totaled about $134 billion at 2012-end.
The 100% stake acquisition also includes SMX’s clearing wing — SMX Clearing Corporation (SMXCC). Given that the operations of SMX are in line with that of ICE’s, this purchase should boost the latter’s operating and competitive efficiencies.
While NYSE has expanded ICE’s market capitalization by over 60% to around $23 billion now, the expanded business faces adversities of the challenging equity markets in the US. Hence, SMX futures trading and clearing operations should help mitigate this operational risk, and at the same time boost ICE’s global market share.
The deal further extends ICE’s growth curve and amplifies its global business opportunities. While obtaining a trading license in Singapore ideally takes anything between 2 and 3 years, ICE will gain a direct and swift entry in the rapidly growing financial hub of Asia — Singapore, primarily within commodities. The company already has clearing platforms in the US, UK, continental Europe, Brazil as well as Canada. The SMX will further strengthen the company’s global footprint.
On the other hand, the acquisition also blends well with the business plans of FTIL, which intends to pay off its debt from the proceeds. The Mumbai, India-based FTIL has been facing liquidity problems after the country’s regulators shut down a spot commodity exchange in India in Jul 2013.
Overall, ICE’s strategic acquisitions and the expected cost savings to be generated from these activities reflect the company’s prudent management and a strong capital position. Conversely, these large-scale developments also raise risks related to integration and a higher debt level. Hence, we remain on the periphery to analyze the developments of the merged organization going forward.
ICE presently carries a Zacks Rank #3 (Hold). However, outperformers in the financial industry include FleetCor Technologies Inc. (FLT), Kemper Corp. (KMPR) and Brookfield Asset Management Inc. (BAM). All these stocks carry a Zacks Rank #1 (Strong Buy).
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