Wednesday 25 April 2018

Will decision to sell and end Dublin independence see ISE's stock rise?

The Irish Stock Exchange came under new ownership last week when Euronext agreed a €159m takeover of the 224-year old market, writes Dan White

Euronext chief Stephane Boujnah and the Irish Stock Exchange CEO Deirdre Somers announce the deal she says will bring innovation capability. Photo: Bloomberg
Euronext chief Stephane Boujnah and the Irish Stock Exchange CEO Deirdre Somers announce the deal she says will bring innovation capability. Photo: Bloomberg
Dan White

Dan White

As finance has gone global, local national markets have increasingly been snapped up by the major international markets. In 2013 the New York Stock Exchange was purchased for $11bn by the ICE commodities exchange. Nasdaq has taken over most of the Scandinavian Stock Exchanges while the Paris, Brussels and Amsterdam Bourses came together in 2000 to form Euronext.

Last week it was Dublin's turn in this game of global musical chairs when Euronext acquired the Irish Stock Exchange. So why is Euronext paying €137m (plus the return of €21.8m of regulatory capital), the equivalent of 16.5 times the Irish Stock Exchange's 2016 ebitda (earnings before interest, taxation, deprecation and amortisation) of €9.6m?

"The transaction will unlock significant growth potential and development opportunities for the Irish Stock Exchange", says Euronext boss Stephane Boujnah.

Unlike many other Irish financial services businesses, the Irish Stock Exchange has successfully diversified away from its domestic market in recent years. Under chief executive Deirdre Somers and her predecessor, the late Tom Healy, it has become the world's number one destination for listing debt securities, investment funds and exchange traded funds (ETFs).

This diversification has transformed the ISE. What was as recently as the 1980s little more than a glorified gentlemen's club with old-school brokers gathering every morning and afternoon for sedate trading sessions across the exchange floor, is now a thriving Irish-based international financial services business. Somers describes the ISE as being a "200-year old start-up".

While the ISE doesn't break out its profits by business activity it is clear that these new, non-Irish activities are now the main income generators. Its total revenues grew from €24.9m in 2016 to €29.4m while pre-tax profits before exceptional items grew from €7.3m to €9.4m over the same period.

Revenue and profits have continued to grow strongly in the current year with revenues up 13pc to €24.2m and pre-tax profits before exceptional items up by 23pc to €8.3m in the first nine months of 2017. Almost two-thirds of the ISE's revenues came from debt issues and investment funds in 2016.

In addition to its strong operating performance the ISE also has a bullet-proof balance sheet with net cash of almost €49m and no bank debt. So why, if the business is performing so strongly, is the ISE being sold now?

Somers herself has in the past been vocal in her defence of the ISE's independence, telling the Financial Times in 2014 that: "When the history of European consolidation is written, it will show the consequences for small economies have not been favourable. Our incentive is to keep the brand of the Irish market alive. If you lose the ISE you lose that incentive." She was singing a very different song at the announcement of the Euronext takeover last week.

"It's never been ideological for me, it's more strategic. I never thought that being bought was a particularly clever thing to do unless it was for a purpose, a very clear purpose. We needed brand and we needed technology and innovation capability. Neither of those two areas would have been possible to grow ourselves organically," she said.

In late October it emerged that the ISE had hired investment bank Moelis & Co to find a buyer. The €158.8m purchase price (including returned capital) will generate a substantial pre-Christmas windfall for the Dublin stockbrokers who owned the ISE.

Davy, which had a 38pc stake, will receive a gross €60.3m, Goodbody (26.7pc) €42m, Invesco (18.5pc) €29.3m and Cantor Fitzgerald and Campbell O'Connor (8.5pc each) will receive €13.5m apiece.

While Boujnah and Somers were both anxious to stress the positive aspects of last week's deal, with Somers becoming head of all of Euronext's debt, fund listings and ETF activities, there may be a downside. Buried in the small print of the deal was a provision for €9m of "integration costs" which are projected to yield €6m in annual "synergies".

Don't be fooled. Translated from brokerspeak that may well mean job losses among the ISE's 135-strong workforce.

The ISE takeover came in the same week as we were reminded once again that not all exchange takeovers end in happily ever after. London Stock Exchange boss Xavier Rolet departed acrimoniously after falling out with his board over a failed attempt to merge with Deutsche Boerse, which was blocked by regulators earlier this year.

Last week's deal with Euronext isn't the first time that the ISE has walked down the aisle with an exchange partner. In 1973 it 'merged' with the London Stock Exchange, in reality a London takeover. That union lasted until 1995 when the ISE regained its independence in the run-up to European monetary union at the beginning of 1999.

The latest match will almost certainly prove to be more enduring. The uncertainty created by Brexit and the increasing consolidation of exchanges into a handful of global players meant that the ISE needed to find a parent with deep pockets. It is to Somers's credit that its strong financial performance meant that the ISE was sold for a very high price to a buyer of its own choosing.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business