ICE's NYSE swoop creates derivatives giant

IntercontinentalExchange Inc agreed as part of its $8.2 billion takeover of NYSE Euronext to pay the New York Stock Exchange operator a termination fee of $750 million if it fails to gain antitrust clearances, suggesting a high level of confidence the deal will go through.

Big Board parent NYSE could get out of the arrangement for a fee of $300 million if a sweeter deal were to come along, according to a regulatory filing on Friday.

ICE failed last year to buy NYSE in a joint bid with Nasdaq OMX Group. At the time, NYSE was involved in year-long pursuit to sell itself to Frankfurt's Deutsche Bourse . In the end, regulators killed both deals, saying they would be anti-competitive.

On its own, Atlanta-based ICE lacks the massive equities operations of Nasdaq or Deutsche Bourse, so there is less overlap between the two exchanges, antitrust lawyers said, making regulatory approval far more likely.

Some in the industry have suggested that CME Group could table a competing offer for NYSE, but they said that would not be likely for several reasons, including the break-up fee.

People familiar with the deal said other issues include potential antitrust concerns and the fact that under the latest agreement, NYSE's Liffe business will do all its clearing through ICE regardless of whether the deal goes through.

"The clearing deal they signed is like a second break-up fee," one of the people said.

Also, CME has not been known for making large deals. "It does not seem to be in its DNA," said Adam Sussman, director of research at Tabb Group.

NYSE CEO Duncan Niederauer acknowledged a higher bid could come along, but that NYSE would not chase after a deal unless it was almost certain it would pass regulatory muster.

"If we did that for another year and at the end we are told, 'we are not going to allow you to do this because of the overlap of your businesses,' we would look beyond foolish," he said in an interview on Thursday.

FOUR-WAY BATTLE

The deal, announced Thursday, would give 12-year old commodities and energy bourse ICE a powerful presence in Europe's lucrative financial derivatives market through control of NYSE Liffe, Europe's second-largest futures exchange, and a major advantage over U.S.-based rivals CME and Nasdaq.

All three want to challenge Deutsche Boerse's European dominance. A shake-up in banking regulation is expected to increase demand sharply for clearing financial derivatives through such exchanges.

"The deal would place a bigger and more aggressive competitor on Deutsche Boerse's doorstep," said Richard Perrott, an analyst at Berenberg Bank.

Regulatory changes in the wake of the financial crisis are forcing banks to channel derivatives business through clearing houses and regulated exchanges to ensure their risk positions can be better monitored than they were when bank dealers were trading complex contracts directly among themselves.

The reforms are expected to be fully operational in Europe in 2014.

ICE's takeover of NYSE Liffe will give it an advantage of existing presence in Europe over Chicago-based CME, owner of the world's largest futures market, and New York's Nasdaq, both of which plan to open their own London-based exchanges next year.

THE PRIZE

While the New York Stock Exchange, an enduring symbol of American capitalism, is NYSE Euronext's prestige business, London's Liffe is the real jewel in the crown.

With profits from stock trading significantly eroded by new technology and the rise of other places for investors to trade, the stock market businesses like NYSE are less valuable to ICE.

The company has said it will try to spin off NYSE's Euronext European stock market businesses in a public offering. This has generated speculation, which the company has denied, that it may also have little interest in the NYSE trading floor on Wall Street.

NYSE made an operating income of $473 million from Liffe in 2011 on revenues of $861 million compared to an income of $533 million on revenues of $1.3 billion from its equities business.

ICE's Jeff Sprecher will be CEO of the combined organisation and Duncan Niederauer, the NYSE Euronext CEO, will be president - a post he said he plans to remain in until at least 2014. The two are longtime friends.

ICE started out as an online marketplace for energy trading before Sprecher initiated a string of acquisitions, from the London-based International Petroleum Exchange in 2001, to the New York Board of Trade and, most recently, a handful of smaller deals, including a climate products exchange and a stake in a Brazilian clearing house.

A combined ICE-NYSE Euronext would leapfrog Deutsche Boerse to become the world's third largest exchange group with a combined market value of $15.2 billion. CME Group has a market value of $17.5 billion, Thomson Reuters data shows.

Hong Kong Exchanges and Clearing is the world's largest exchange group, with a market cap of $19.5 billion. (Additional reporting by New York bureau; Writing by Aaron Pressman and Carmel Crimmins; Editing by Philippa Fletcher and Alastair Macdonald)