Majestic Research

The Wall Street Journal

Euronext’s Critics Are Hard to Please: Some Shareholders, Analysts Are Pressing CEO for a Say In Plan to Join With NYSE

By Alistair MacDonald in London and Aaron Lucchetti in New York
Published: August 31, 2006

As European stock-exchange operator Euronext NV posted a sharp rise in first-half earnings, its chief executive came under fire from some shareholders and analysts for sticking with his plans to combine with NYSE Group Inc. and not letting holders have a say on a rival offer.

Since Euronext and NYSE, the operator of the New York Stock Exchange, struck a deal to merge in June, the U.S. group’s share price has fallen about 5%.  As a result, the relative value of a rival offer for Euronext from Deutsche Börse AG, the operator of Frankfurt’s stock and derivative exchanges that has seen its share price rise more than 10% during the same period, is higher. Euronext shareholders are scheduled to meet to vote on the deal in early December.

Yesterday, in a slight change from its usual firm backing of its agreement with NYSE, Euronext opened the door slightly to Deutsche Börse. Euronext CEO Jean-François Théodore didn’t rule out putting the Deutsche Börse bid to a shareholder vote.  He argued, though, that it is too early to compare the two values because the Deutsche Boerse offer is based on a volume-weighted stock-price average over three months and that that shouldn’t be calculated until the day of the vote on the deal.

NYSE’s chief financial officer, Nelson Chai, said the recent stock-price moves of NYSE and Deutsche Börse are a “near-term concern,” but stock prices could easily change by the shareholder vote.

“We don’t have to contemplate sweetening the bid” because the deal has been agreed upon by both companies’ boards and managements, Mr. Chai said in New York. Still, he added that the NYSE has the financial “flexibility” to improve its bid if needed.

The NYSE offer is valued at €66 ($84.65) a share, compared with €72 from Deutsche Boerse, calculates Mamoun Tazi, an analyst at Man Securities in London. The likelihood of Euronext shareholders approving the current deal “is very slim at this stage,” he said.

Doug Atkin, head of market-analysis firm Majestic Research Corp, says the likelihood of NYSE and Euronext finishing a merger has dropped recently because the NYSE share price has declined amid the exchange losing some market share in trading of its own listed stocks.  Despite the agreement between Euronext and NYSE, Mr. Atkin says the deal between the two companies has only a 30% chance of being finalized, compared with a 40% chance of a Deutsche Boerse-Euronext deal and a 30% chance of Euronext staying independent.  In Amsterdam, Euronext closed at €69.80, up €2.10, or 3.1% In New York, NYSE closed down 1.5% at $59.05.

The NYSE has several initiatives that could help its share price in the coming months, including planned launches of new stock-options trading technology and expanded electronic stock trading.

One large Euronext shareholder yesterday called for the chance to vote on the Deutsche Börse offer.  “We see it as a breach of fiduciary duty of the board that a valid offer, for noneconomic reasons, not be brought to shareholders,” said Chris Hohn, of the Children’s Investment Fund Management (UK) LLP, also known as TCI, on a conference call for analysts.

TCI is a hedge fund that owns about 10% of Euronext. Mr. Hohn has been an activist investor in stock-exchange operators, having helped change management at Deutsche Boerse.  Mr. Hohn said he might call a shareholders’ meeting to be held alongside the official Euronext annual meeting in December.  Deutsche Boerse declined to comment.

Euronext, which runs financial markets in London, Paris, Amsterdam, Lisbon and Brussels, also has made a strategic case for combining with NYSE to create the largest financial market in the world.  A combination with Deutsche Boerse would be hard to make work for reasons including competition concerns about combining their derivatives businesses, Euronext has said.  Euronext said it expects to complete the deal with NYSE in the first quarter of 2007.

Other shareholders are divided. Euronext shareholder Peter O’Reilly at I.G. International Management said Euronext and Deutsche Börse should sit down and work out their differences. But Atticus Capital, which owns about 9% of Euronext and big stakes in NYSE and Deutsche Boerse, has been supportive of the NYSE deal, saying it is a good value for both companies’ shareholders.

Euronext’s first-half net profit was €193.7 million ($248.4 million), up from €93.4 million in the year-earlier period.  First-half earnings before interest, tax and amortization rose 57% to €220.3 million from €140.1 million a year earlier, helped by strong trading activity at its cash equities and derivatives business.

Second-quarter net profit rose 63% to €86.6 million from €53.1 million in the year-earlier period.  It was boosted by increased volumes in derivative and equity trading on the back of volatile markets, increased program trading and investors’ uncertainty over the direction of interest rates. Revenue in the second-quarter reached €289.6 million, up 21% from €238.6 million a year earlier. In Amsterdam, Euronext closed at €69.80, up €2.10, or 3.1%.