Like Any Broker, Michael Spencer Can Start an Auction

(Bloomberg Gadfly) -- Michael Spencer has achieved many things during his career in the City of London. But he won't go on forever, and at some point he needs to arrange an exit from Nex Group Plc, part of his old ICAP empire. CME Group Inc.'s interest in the electronic trading platform could offer the chance for an elegant farewell this year.

Nex has been mooted as a target for one of the big exchanges since Spencer agreed a sale of the ICAP voice broking business in 2015. So these latest takeover talks could be viewed as part of an artfully managed strategy of which that earlier separation was just the first step. Now Nex has got a few trading cycles under its belt, the timing makes sense.

The logic for CME would be to merge its businesses trading U.S. treasury and foreign exchange futures with Nex's corresponding Brokertec and EBS cash market platforms. This could bring capital synergies, as well as conventional operational cost savings.

The market is expecting an auction culminating in a punchy price. No wonder. Even after the shares' 30 percent jump on Friday after Bloomberg News revealed talks with CME, Nex is worth only 3.3 billion pounds ($4.6 billion) -- a morsel for CME ($56 billion) or Intercontinental Exchange Inc. ($43 billion).

But a feeding frenzy isn't guaranteed. For Deutsche Boerse AG, capitalized at $26 billion, a deal is less simple since it would put pressure on its credit rating. London Stock Exchange Group Plc is without a permanent CEO and would probably need a rights offering to fund a takeover. A break-up bid is another possibility.

Spencer's assent is critical to the deal. He owns 18 percent of Nex, and any new owner is going to want him on board to help manage the integration. Sure, he will be keen to secure his legacy by finding the company a suitable parent. But that's unlikely to stop him deciding between competing bids mainly on price.

This is a scarce and affordable asset, and Spencer has leverage to demand a high premium. Liberum analysts suggest 10 pounds a share is possible in an auction -- 58 percent more than Nex's volume-weighted average share price over the past three months.

A buyer would need to take a very long-term view in that situation. An offer at that level would be worth about 4.2 billion pounds, including net debt. Based on Nex's forecast operating profit for 2020, the return would be a meager 5 percent, although that ignores the potential for synergies. The exit multiple would be a punchy 29 times forward earnings. CME may nevertheless tolerate that given that its own rating is 25 times.

CME stock didn't move dramatically on news of the talks, so its shareholders don't seem overly worried. Nex would be well advised to get CME on the hook as soon as possible -- and see what else comes along.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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