March 13 (Bloomberg) -- Members of the New York Mercantile Exchange, the world’s biggest energy market, voted 93 percent in favor of selling a 10 percent stake to buyout firm General Atlantic LLC for $170 million.
The approval moves Nymex toward an initial public offering later this year as members seek the higher valuation other exchanges have reaped. Shares of the Chicago Mercantile Exchange and the Intercontinental Exchange Inc., the second-biggest energy exchange, doubled in less than a year after selling shares.
“Time is of the essence here because I don’t know how long the market’s going to be so robust,” said Stephen Sundheimer, a Nymex member who voted in favor of the sale. Sundheimer, who owns one seat, said he approved the deal hoping to maximize the value of his investment.
The investment by Greenwich, Connecticut-based General Atlantic will help Nymex become a public company by forcing changes in governance and providing a partner who has experience with Wall Street investment banks, Nymex chairman Mitchell Steinhause, 58, said in a letter to members last year.
Nymex president James Newsome, who will become the exchange’s chief executive officer as part of the change in corporate structure, said he could not say when this year the IPO will take place.
“We certainly view the vote today as a mandate by shareholders to continue in the direction we’re going,” Newsome, 46, said in an interview.
Seat Sale
About 600 people own Nymex’s 816 shares, which are called seats because they confer the right to trade on the exchange in addition to the equity. General Atlantic’s purchase applies to the equity and doesn’t affect the trading rights.
A seat on the Nymex sold for a record $3.9 million this afternoon ahead of the vote, the exchange said. That values the exchange’s equity and trading rights at about $3.2 billion and signals that investors expect the equity to rise higher than the $1.7 billion implied in the stake sale.
The Chicago Mercantile Exchange, the largest U.S. futures exchange, first sold shares to the public in December 2002 for an initial market value of about $1.1 billion. By the end of 2003, the capitalization more than tripled to $5.8 billion; it’s $14.7 billion today.
While the Nymex may not be able to match the tenfold increase in Chicago Mercantile Exchange shares, “the assumption that Nymex stock may double in the first year of trading is plausible,” said Robert Webb, a professor of finance at the University of Virginia.
NYSE
Intercontinental Exchange, owner of the former International Petroleum Exchange in London, sold shares in November. The Atlanta-based company now has a $4 billion market value, up from $1.4 billion after the IPO.
Shares of Intercontinental rose $4.14, or 6.2 percent, to $71.28 in New York Stock Exchange composite trading today. They are up 26 percent this month.
The New York Stock Exchange has also been part of the rally in exchange shares, benefiting General Atlantic. The NYSE last week took over Archipelago Holdings Inc., owner of an electronic exchange, and became a publicly traded company. Its shares jumped more than 25 percent on their first day.
General Atlantic was the largest shareholder of Archipelago, whose shares more than tripled after the deal with the NYSE was announced. The gains were worth almost $600 million to General Atlantic.
“Nymex has the ability and capability to capitalize on electronic trading,” General Atlantic president William Ford said in an interview. Ford, 44, said the overwhelming majority of Nymex members want the exchange to react to competitive pressure from rivals such as Intercontinental Exchange.
“That’s what showed up in the vote, the mandate to move forward rather aggressively,” he said.
Right Time
The members of the 134-year-old Nymex are hoping for gains after an IPO that are similar to other exchanges, said Phil Stiller, a research analyst at Renaissance Capital, an IPO research and money management firm in Greenwich, Connecticut. “This is definitely a good time for derivatives exchanges to go public, especially the energy exchanges,” he said.
The General Atlantic investment comes in two phases. The first, approved today, will equal $160 million, resulting in a direct payment of about $196,000 to each holder of a Nymex share.
An additional $10 million will be distributed to shareholders if Nymex’s IPO takes place by the end of the year and results in a market value of $2 billion or more. The final $10 million is also contingent on the exchange holding a shareholder meeting by May 1 to approve a reduction of the board to 15 people from 25.
As part of the transaction approved today, Ford will join the board as a director.
Rival Bids
General Atlantic won out in a bidding war among investment firms such as Blackstone Group LP and Battery Ventures, as well as a group led by former Nymex chairman Michel Marks.
Some of the funds raised in a share sale might be used to upgrade Nymex’s electronic trading systems, Stiller said. A growing number of exchanges are adopting electronic trading as investors look for faster and cheaper ways to trade futures, options and equities.
The Nymex, which gets most of its income from live, or open- outcry, trading on its floor in Manhattan, faces pressure to improve its electronic systems. Intercontinental Exchange’s ICE Futures last month introduced an electronic contract based on West Texas Intermediate crude oil, the grade used for Nymex’s benchmark contract since 1983.
Daily volume of the ICE Futures U.S. crude oil contract has averaged about 17 percent of the Nymex contract.
London Trading
In contrast, Nymex’s attempt to take market share from ICE Futures Brent crude oil contract in London failed. Begun in late 2004, Nymex’s Brent contract has averaged less than 1 percent of ICE Futures daily volume. The trading floor in London, which Nymex opened last year at a cost of as much as $20 million, will be closed this year in favor of electronic trading.
“I am concerned that the Nymex hasn’t fully thought through their competitive strategy as evidenced by the predictable and costly failure of their London open-outcry experiment,” Webb said. ``If this continues Nymex may become a takeover candidate in the future.”
Renaissance’s Stiller said there is still time for Nymex to capitalize on investor interest in exchanges.
“It’s taken them a bit longer than everyone else, but just because they’re a bit late to the party doesn’t mean they won’t get a good valuation,” he said.
Bruce Weber, an associate professor at the London Business School, said the Nymex risks getting its IPO ready too late. “The valuations in the exchange space are getting high.” A slowdown in growth could lead to punishing losses for the shares of these investments, according to Weber.
“Look at Google’s recent sell off to see what happens when a hyper-growth company becomes merely high growth,” Weber said.