Euronext: Going into another dimension?

[dropcap]A[/dropcap]ccording to Bloomberg, Euronext is the leading bidder for the acquisition of MarkitServe, which is IHS Markit’s derivatives processing unit. The price would be above $1bn. The purchase of this business would be a very positive one for Euronext (in terms of EPS) and the transformational acquisition that investors have been waiting for some years already. The London Stock exchange is also interested in the business unit. In terms of financing, we believe Euronext would be able to finance the acquisition (at the current price in the area of $1bn) by issuing debt. We believe indeed Euronext has about a 3x EBITDA capacity (about €1.1bn in 2019 as we estimate net debt at zero for that year and EBITDA in the area of €370m). This is, however, without any consideration regarding the regulator’s position if the deal was to generate some goodwill making tangible equity negative. According to IHS, MarkitServe generated $150m in revenues in 2017. With a 50% EBITDA margin (bestguess and given Euronext’s current EBITDA margin at 56% to factor in potential synergies), this would add €65m to Euronext’s EBITDA and makes the $1bn price rather decent (multiple at about 13.5x EV/EBITDA). With a 2% cost of debt, the operation would be earnings accretive (+13% on 2019 earnings). The purchase price still remains to be seen as LSEG is said to be interested as well. The UK stock exchange already has strong expertise in the post-trading area, making synergies higher (allowing it to outbid). Even if we need to see more detail regarding the financing of this operation (and how Euronext wants to integrate it), the acquisition would be a strong catalyst for the market venue. The full analysis is available on www.alphavalue.com