NYSE Euronext (NYX) would likely want Nasdaq OMX Group (NDAQ) to offer a massive fee to guarantee that its takeover bid will pass antitrust regulatory muster, before the NYSE is willing to engage in deal talks, two sources with knowledge of the matter said.
The NYSE, eyeing AT&T's (T) ambitious bid for T-Mobile USA as an example of another deal that faces tough regulatory scrutiny, would want as much as $2 billion in a so-called "reverse break-up fee" from Nasdaq, the sources said.
That is far higher than the hundreds of millions of dollars that Nasdaq is prepared to offer, two other sources said, and the issue is likely to be yet another sticking point in its contentious bid to buy the New York Stock Exchange owner.
The board of NYSE Euronext last weekend rejected Nasdaq and IntercontinentalExchange Inc's (ICE) $11.3 billion takeover bid, preferring to stick with a $10.2 billion bid from Deutsche Boerse AG on grounds that it was a better strategic fit and more likely to be approved by antitrust regulators.
Since then, Nasdaq has been courting major NYSE investors to convince them the NYSE board's decision was wrong. Nasdaq Chief Executive Robert Greifeld raised the idea of a reverse breakup fee with hedge fund managers on Friday -- but was coy about its size, one investor said.
Two sources familiar with Nasdaq and ICE's thinking say they are considering a reverse break-up fee close to the 250 million euros ($361 million) agreed in NYSE's friendly deal with the German exchange.
Nasdaq would likely offer a higher fee than $361 million, but one "in that realm," one of the sources said.
A reverse break-up fee is paid to the seller by the buyer when it is unable to close a deal due to antitrust or other reasons.
Under their offer, Nasdaq and ICE would divvy up NYSE Euronext, with ICE taking the derivatives business for $6.3 billion and Nasdaq keeping the rest.
One of the sources said NYSE currently values its derivatives business at around $5 billion, leading to roughly $1.3 billion in taxable gains for Nasdaq. Taxes on that could come to $350 million to $400 million, the source said.
Some investors have also separately raised concerns about possible tax issues with the Nasdaq bid.
Nasdaq and NYSE declined to comment. The sources were not authorized to speak publicly about the discussions.
EYEING AT&T'S EXAMPLE
A merger of Nasdaq and NYSE, the top U.S. stock and listing exchanges, would face considerable antitrust hurdles, not unlike AT&T's $39 billion plan to buy Deutsche Telekom's (DTEGn.DE) T-Mobile USA to create the top U.S. mobile carrier.
AT&T has promised to pay Deutsche Telekom $3 billion cash, transfer valuable spectrum, and a roaming agreement if it is unable to get regulatory clearance for the deal.
Following AT&T's example, Nasdaq and ICE would have to come up with as much as a $2 billion break-up fee for NYSE to take it seriously, the first two sources said. One of them said the fee would need to be well over $1 billion.
NYSE had looked into the possibility of merging with Nasdaq a year ago, the sources said, but decided the fit was unattractive, the synergies were not what it had initially thought, and that it couldn't be done for antitrust reasons.
TOUGH ANTITRUST REVIEW
Nasdaq CEO Greifeld, however, has sounded confident he could overcome regulatory issues, telling investors the combined company could divest business units including the American Stock Exchange, or AMEX.
Nasdaq has made a preliminary presentation to the U.S. Department of Justice's antitrust staff about its offer, while NYSE and Deutsche Boerse have filed papers under the Hart-Scott-Rodino Act for an antitrust review of their deal, according to two of the sources.
Greifeld said he hoped to get a read on how the department was thinking about antitrust issues in the next six or seven weeks, said one investor who met with him last week.
A Justice Department review for a complex deal such as this typically takes nine months to a year, and so while Nasdaq could glean what concerns officials have from the questions they ask, it would be just a guess, antitrust experts said.
"To clear the deal as proposed, it would take months not weeks," said Jonathan Grossman, an antitrust lawyer at Cozen O'Connor in Washington. "Absent a significant divestiture, I wouldn't expect this transaction to clear without a protracted Justice Department investigation."
Regulatory issues are, however, critical in both deals.
Deutsche Boerse's planned acquisition of the iconic NYSE would create the world's largest exchange operator and give it a tight grip on European exchange-traded futures. It faces a tough antitrust review in Europe.