(The following statement was released by the rating agency)
-- The NASDAQ OMX Group Inc. is teaming up with Intercontinental-Exchange (ICE) to acquire, on an unsolicited basis, NYSE Euronext, which has already signed an agreement to merge with Deutsche Boerse.
-- We are placing the NASDAQ OMX on CreditWatch Negative.
-- We expect to update the CreditWatch after we determine if NASDAQ OMX is the winning bidder for NYSE Euronext.
April 1 - Standard & Poor's Ratings Services said today that it placed its ratings on The NASDAQ OMX Group and its affiliates, OMX AB and NASDAQ OMX Stockholm AB, on CreditWatch Negative.
"The CreditWatch action follows NASDAQ OMX's announcement that it and ICE plan to acquire NYSE Euronext and split it up between themselves. Although there are many compelling strategic advantages and cost-saving opportunities for a NASDAQ OMX-NYSE Euronext combination, the use of debt to fund a portion of the acquisition price greatly increases the combined organization's financial risk profile," said Standard & Poor's credit analyst Charles D. Rauch.
Under the proposed transaction, NASDAQ OMX and ICE would jointly acquire NYSE Euronext for about $13.3 billion. NASDAQ OMX's share would be about 52%; ICE's share 48%. NASDAQ OMX would finance its $7.0 billion portion of the purchase price with $2.8 billion of common stock, $2.1 billion of cash, and the assumption of $2.1 billion of NYSE Euronext debt.
Total debt, including $2.1 billion of acquisition financing, at the combined company would approximate $6.5 billion. We estimate key credit metrics, at least initially, would not be those of an investment-grade company. This leads us to an additional concern. NYSE Euronext bonds contain a "change of control triggering event". If NASDAQ OMX succeeds in acquiring NYSE Euronext and the company is downgraded below investment grade by two nationally recognized statistical rating organizations, the bondholders can put the NYSE Euronext bonds to NASDAQ OMX, leading to a potential credit cliff.
On the positive side, if NASDAQ OMX's bid is successful, it would acquire the world's premier stock exchange--the New York Stock Exchange--plus four exchanges in Europe. With the addition of NYSE Euronext, NASDAQ OMX would also have a near 50% market share in U.S. stock option trading.
NASDAQ OMX is initially projecting about $450 million of run-rate cash synergies. We believe this target is reasonable given the overlapping businesses in the U.S. and Europe and NYSE Euronext's high expense base relative to other rated exchanges. In addition, NASDAQ OMX has demonstrated its ability to wring out excess costs from previous acquisitions, such as the Philadelphia Stock Exchange and OMX AB.
During the CreditWatch period, we will gather additional information about the details and timing of the expected cost synergies. This is important in estimating free operating cash flows and assessing the speed by which NASDAQ OMX can deleverage the balance sheet. A critical challenge will be to accumulate sufficient cash in the first two years after the acquisition to service the $1.4 billion of debt that matures in 2013.
If we believe NASDAQ OMX will quickly deleverage the balance sheet (and refrain from share repurchases) during the next two years (2012-2013), we would likely keep the company investment grade. Otherwise, the ratings would fall into the non-investment-grade category. If NASDAQ OMX is unsuccessful in its attempt to acquire NYSE Euronext, we would most likely affirm the ratings with a negative outlook. RELATED CRITERIA AND RESEARCH
-- Credit FAQ: What's Behind the Global Exchange Industry's Urge to Merge?, Feb. 24, 2011
-- 2011 Outlook: Serious Reforms Make Future Unclear For Global Exchanges And Clearinghouses, Jan. 10, 2011
-- The NASDAQ OMX Group Inc., Dec. 17, 2010
-- Research Update: The NASDAQ OMX Group Inc. Outlook Revised to Negative from Stable; Ratings Affirmed, Dec. 16, 2010
-- Credit FAQ: Are Exchanges and Clearinghouses 'Too Big To Fail'?, Nov. 11, 2010
-- Credit FAQ: Creditworthiness At Exchanges And Clearinghouses Set To Be Tested Further By Changing Market And Sustained Pressure On Tariffs, Oct. 19, 2010
-- Standard & Poor's Updated Methodology for Rating Exchanges and Clearinghouses, July 10, 2006 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Primary Credit Analyst: Charles D Rauch, New York (1) 212-438-7401;
[email protected] Secondary Contacts: Nik Khakee, New York (1) 212-438-2473;
[email protected]
Thierry Grunspan, Paris (33) 1-4420-6739;
[email protected] (New York Ratings Team)
TEX-S&P puts NASDAQ OMX ratings on watch negative
