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Analyst Blog

IntercontinentalExchange, Inc.’s (ICE - Analyst Report) share price rose after it was edged out by Hong Kong Exchanges & Clearing Ltd. (“HKEC”) in the takeover bid for the 135-year old London Metal Exchange (“LME”). In contrast, HKEC’s share prices fell 4.2% to close at $13.70.

Investors were bullish on IntercontinentalExchange stock as the company may now focus on increasing shareholder value in a number of ways. Moreover, losing the bid is favorable for the company’s financials as it would have raised its total debt. Its total debt currently stands at $875 million with a debt-to-equity ratio of 24%.

With cash and cash equivalents of $968 million in its books, IntercontinentalExchange can also focus on unburdening some of its debt and strengthening its balance sheet. Its interest coverage ratio, which is pegged at 24.86% (trailing 12-month), will also improve if it reduces its debt obligations as it would have to pay lesser interest to service the borrowings.

However, a successful takeover of LME would have benefited IntercontinentalExchange in numerous ways as well. It would have enhanced the company’s operations to a great extent and paved the way for a stiffer competition with its arch rival CME Group Inc. (CME - Analyst Report), which presently retains the leadership position in the world of commodity futures exchanges. Last month, it was eliminated from the race to acquire LME, leaving HKEC and IntercontinentalExchange as the final contenders.

The buyout for LME, the exchange that pioneers in setting benchmark prices for six base metals, was settled for an outrageous amount of $2.16 billion. After winning the bid HKEC announced that it could assist LME in receiving approval for opening warehouses in China as it has greater access to the Chinese markets. Its relations with China helped it to sweep away the deal from IntercontinentalExchange.

We retain our long-term Neutral recommendation on IntercontinentalExchange. It also has a quantitative Zacks #3 Rank, which translates into a short-term Hold rating.

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