Bidders Circling Spanish Exchange Show Growing Hunger for Data

(Bloomberg) -- For Javier Hernani and the Spanish stock exchange he runs, the overtures couldn’t have come at a better time.

With revenue and profits sinking, the Madrid’s bourse’s share price was down the past five years -- until this week, when his Bolsas y Mercados Espanoles SA suddenly emerged as the target of a bidding war. Switzerland’s SIX Group AG offered $3.1 billion and has signaled its willingness to pay more; Euronext NV, owner of the Paris and Amsterdam bourses, is in talks for its own bid, and the German exchange has also expressed interest.

The clamor for a struggling business far from Europe’s financial centers underscores how industry consolidation is running into an insurmountable hurdle: following years of mergers, there aren’t a lot of potential takeover targets left. And yet, technological innovation and the mountains of data exchanges generate make size ever more critical. The risk for buyers is that they’ll overpay.

“Buying BME is about scale, which leads to the ability to capitalize further on data,” said Niki Beattie, founder of the London-based consulting firm Market Structure Partners. “If you have enough dominance in a market, then data becomes more valuable.”

It’s been a record year for industry merger activity, highlighted by London Stock Exchange Group Plc’s $27 billion agreement to buy Refinitiv -- and Hong Kong Exchanges & Clearing Ltd.’s subsequent failed $37 billion bid for LSE. But it was Intercontinental Exchange Inc.’s acquisition of Interactive Data Corp. four years ago that set the train in motion. That deal made data a core revenue engine.

Exchanges have been merging ever since they started demutualizing more than 20 years ago, moving from utility infrastructure to public companies beholden to shareholders. And now the five biggest -- led by ICE -- accounts for more than half of global exchange revenue, according to Burton-Taylor International Consulting, which tracks the industry.

Meantime, alternative venues such as dark pools mushroomed and high-speed traders started to overrun some public markets. Europe’s revised markets rules tried to redress some of the balance but introduced a new category called systematic internalizers that also compete with stock exchanges, fueling the urgency to rewrite business plans.

At the combined LSE-Refinitiv, information services will contribute about 70% of total revenue, compared to the LSE’s 40% in 2018, according to Bloomberg Intelligence.

Data Hungry

Georgi Gunchev, an analyst at Bloomberg Intelligence, says the value of data is bound to increase as computing power grows. He cited the boom in quantitative investing and machine learning strategies, which depend on a constant stream of data. The shift to passive investing has also boosted demand for indexes, such as the LSE’s FTSE Russell business, he said.

“Everyone is saying with data, how do you get away from just pushing out data to companies, just pushing out data to investors, and giving them more usable data,” said Nelson Griggs, president of the Nasdaq Stock Exchange.

The LSE deal pairs a creator of data with a distributor, changing the game for rivals. Once the LSE-Refinitiv merger is completed, exchanges would command roughly 25% of traditional market data industry revenue, Burton-Taylor said. Bloomberg News is owned by Bloomberg LP which also operates data venues.

To be sure, history is littered with failed attempts at cross-border exchange mergers, including at least three attempts by the LSE to combine with Deutsche Boerse AG. European Union regulators vetoed Deutsche Boerse and NYSE Euronext’s plan to create the world’s biggest exchange, saying it would hurt competition.

At Spain’s BME, about 40% of revenue comes from trading in companies like Santander SA and Telefónica SA, while data generates 23%. Net income is headed for a fourth straight annual drop in 2019 and, until this week, the stock’s been a laggard. That changed overnight, though, following a 38% jump on Monday. It could rise about another 10%, according to a Bloomberg News survey.

“Some of this is a data play,” said Alasdair Haynes, chief executive officer of Aquis Exchange Plc, a pan-European equities venue. “Data is a huge profit centre and exchanges need to protect it as venues proliferate.”

Regulators, though, are zeroing in. After complaints about the sky-high price hikes for exchange data European officials began an industry-wide study on how to curb price growth.

As exchanges’ core trading business declines, Hernani said last year that he didn’t rule out joining a bigger entity. A BME executive since 2003 who assumed the top job in 2017, Hernani has focused on digital services. Earlier this year, the company received an investment-grade rating for the first time from S&P Global Ratings. BME declined to comment for this article.

Business aside, what BME offers SIX Group is location -- inside the EU. Officials in Brussels sought to force investors in the bloc to trade within its borders and avoid SIX. Switzerland retaliated by blocking trading of Swiss stocks in the EU.

SIX still needs to get Europe’s blessing against the backdrop of its spat with Brussels.

“Given Euronext’s and potentially Deutsche Boerse’s interest I would expect there to be some serious political lobbying,” said Beattie.

--With assistance from Rachel Evans and Ben Scent.

To contact the reporter on this story: Viren Vaghela in London at vvaghela1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net, Keith Campbell

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