The Philadelphia Stock Exchange has hired Greenhill & Co. (GHL) to help it find a buyer or arrange an initial public offering, formalizing a months-long effort by the exchange’s owners to sell their stakes.
The oldest U.S. securities exchange, founded in 1790, is accelerating its sales efforts at a time when its fortunes are on the rise. It closed its stock-trading floor last year, but has built a thriving business in stock options and now ranks as the third-largest options exchange behind the Chicago Board Options Exchange and the all-electronic International Securities Exchange (ISE).
Options trading volume is at record levels, as investors seek to hedge or exploit market volatility, and rival exchanges such as the Nasdaq Stock Market (NDAQ) and NYSE Euronext (NYX) are seen as likely buyers as they seek to expand their franchises beyond stock trading. Neither exchange would comment.
“We’ve hired Greenhill to assess our strategic options, and the board will ultimately determine what we are going to pursue,” said Philadelphia Stock Exchange Chairman and Chief Executive Meyer Frucher.
He wouldn’t comment on the likelihood of a deal, but a person close to the process said he anticipates that a sale at a minimum of about $400 million could occur within the next few months. An initial public offering would most likely have to be pushed into late 2008, another person said.
Frucher held talks with potential buyers prior to hiring Greenhill earlier this month, but the exchange’s asking price has risen in the interim along with its market share. Philadelphia’s share of exchange-traded options volume jumped to 15.6% in July from 13.5% in all of 2006 and 11% in 2005, according to the Options Clearing Corp. The exchange also still sees a small amount of electronic stock trading.
Philadelphia’s negotiating stance also may have been whetted by the ISE’s agreement earlier this year to sell itself to Deutsche Borse’s Eurex unit for $2.8 billion at a healthy 44 times ISE’s earnings.
The Philadelphia exchange had a pretax gain of $8.93 million in 2006, reversing a $14.9 million loss the previous year. It lost $424 million last year on an after-tax basis.
Philadelphia is likely to exploit the need of exchanges focused on single markets such as equities or futures to expand their product bases as they compete with off-exchange trading platforms.
Prospective buyers such as Nasdaq and NYSE Euronext could easily digest the regional exchange despite other deals they have recently completed or are pursuing, analysts said. The heads of both exchanges have targeted options trading as a likely area of expansion.
“They are capable of absorbing Philadelphia, and they will all look at it,” said Richard Repetto, an analyst at Sandler O’Neill & Partners.
NYSE, which owns the New York Stock Exchange, bought Euronext NV last April. Nasdaq built a 30% stake in the London Stock Exchange (LSE.LN) in a failed effort to buy the LSE and has an agreement to buy Nordic exchange operator OMX AB (OMX.SK) for about $3.7 billion. Greenhill represented Nasdaq in its LSE bid.
Other potential buyers could include the New York Mercantile Exchange (NMX), the International Commodities Exchange and the Chicago Board Options Exchange, though CBOE is embroiled in a trading rights battle with members of the Chicago Board of Trade that could make it difficult to participate in an auction.
Philadelphia’s sales negotiations earlier this year stalled, when a former seatholder filed a lawsuit accusing the exchange of diluting former members’ ownership interests when it sold a majority stake to six Wall Street firms in 2005 and 2006. The exchange reached a preliminary settlement of the lawsuit in late June, though terms weren’t disclosed.
Units of Citigroup Inc. (C), Credit Suisse Group (CS), Merrill Lynch & Co. (MER), Morgan Stanley (MS), UBS AG (UBS) and Citadel, a Chicago-based hedge fund, owned just under 90% of the Philadelphia exchange, with the biggest stakes controlled by Citadel, Merrill and Morgan Stanley. Frucher and other exchange executives cumulatively own a little more than 5% of the exchange’s equity. Those stakes will change once the settlement is final.
By Jed Horowitz, Dow Jones Newswires; 201-938-4047; jed.horowitz@dowjones.com
