The $564 million State Street Corporation paid for multi-bank foreign exchange (FX) trading platform Currenex initially looked rich when it was announced on January 22. However, even cursory analysis suggests it had far from overpaid. The deal was done on a multiple of 22 times Currenex’s forecasted 2007 earnings, hardly excessive.
What it highlighted was how cheaply rival platforms HotspotFX and EBS were sold in 2006. Knight Financial bought Hotspot, which had made pre-tax profits in 2005 of around $9 million, for just $77.5 million. EBS was snapped up from its mainly bank consortium owners by Icap for around $825 million on a multiple that might have been as low as 15 times, once synergies were included.
There has been plenty of talk about competition in FX, but that should not have suppressed valuations to the extent they have been. After all, even if there are obvious pressures in FX, there are greater ones in the equity market. Therefore, it seems wrong that a business like the London Stock Exchange should be rated much higher than EBS and other FX trading venues.
Now that deal has been done, investors will inevitably see what is left to buy. Looking ahead, EBS – freed from the shackles imposed by its previous owners – remains the jewel in the crown. It still has the potential to be the quasi-FX exchange, but as of yet the ownership of such a trophy asset is not reflected in Icap’s share price.
Icap got EBS on the cheap because it was the only bidder. Its timing was spot on. FX is now recognized as an asset class with no glass ceiling restricting its growth. Any profitable FX platform that comes on to the market in the future will not be given away so cheaply. If Icap decided to spin out EBS tomorrow, the chances are it would double its money.
The change in the perception of the valuation of FX platforms should extend to those who are fortunate to own them. Icap is currently trading on a prospective P/E ratio of 20. Its ownership of EBS alone makes this look odd and ultimately many will question why the regulated exchanges, which on the whole have far less diversified product lines, should be rated more highly.
