Description

Introduction

Euronext operates 7 European exchanges; it is the leading securities and derivatives exchanges in 4 main markets (France, Netherlands, Belgium, and Portugal), providing services including:

• securities listings
• cash and derivatives trading
• post-trading services (1 central counterparty clearing house, and 4 central security depositories in Portugal, Norway, Denmark, and Italy)
• market data and market solutions

Euronext operates across Europe running a single platform called Optiq with a single order book and bond trading platform with a sustainable moat that will steadily increase earnings—50% of its net income goes to dividends.

While Euronext does not pursue buybacks, it has acquired a game changing holding— Borsa Italiana (the Italian Stock exchange) worth €4.4B (USD 5.34B) on April 2021, which provides Euronext with its own clearing house and improved custody for clients.

Growth will also come mainly from non-trading volume activities such as post trade clearing, which includes clearing, custody and settlement, and data services. Non-volume related revenue accounted for 55-65% of total revenue and covered 144-151% of underlying operating expenses inclusive of depreciation and amortization.

Acquisition of Borsa Italiana completes the value chain by having an In-House clearing service independent of LSE—Euronext will leverage its integrated value chain for European expansion

Euronext previously did not have its own clearinghouse; since 2003 they had a revenue sharing agreement contract with Clearnet – the continental European arm of LSE’s LCH clearing business—a third-party clearing house for most of its cash and derivatives trading, LCH SA.

This was a disadvantage limiting growth of its own post-trade offerings to OTC and derivatives. Euronext previously proposed on various occasions to take the control of LCH SA and was unsuccessful.

When the London Stock Exchange decided to acquire Refinitiv, Anti-trust laws required them to sell off Borsa Italiana to Euronext. Euronext acquired Borsa Italiana for 4.4B through bridge financing. Borsa Italiana brings a significant contribution of €337M for the first 8 months of consolidation. The first integration from the Borsa Italiana group generated €10.1M. In Q2 2022, Borsa Italiana’s revenue contribution alone was approximately €130M.

The acquisition gave Euronext its own clearing service called CC&G, a clearing house in Milan which means Euronext no longer relies on LSE's LCH SA arm to provide clearing arrangements.

Euronext has the capability to directly manage the entire value chain for the first time, giving possibility for European expansion for open-access central clearing party activities with teams in Italy and France. CCP’s (central clearing party) assets and liabilities under repurchase transactions amounts to €168 billion as of June 2022; with the inclusion of cash and other cash items, total current assets are close to €170 billion.

CC&G plans to use a new Value at Risk framework, in an ongoing dialogue with regulators; it is also slowly being rebranded and integrated as Euronext Clearing with teams in Italy and France. Euronext Clearing is a clearing house on 14 markets, across a range of trading venues including Euronext Milan, MTS, BrokerTec and Hi-mtf. Asset classes cleared include equities, ETFs, Closed-end Funds, Financial Derivatives, Commodities (Agricultural & Energy) and Fixed income (Cash and Repos markets).

With its own clearing framework across Europe, this significantly increases Euronext’s footprint in the post-trade space— as of 2022, 91+ contracts cleared. In addition, Euronext will be in an ideal position to innovate and improve time-to-market, notably derivatives products.

The London Stock Exchange Group noted Euronext's LCH deal runs through to 2027. However, Euronext has "limited early termination rights", including one exercisable in January 2024.

Revenue has been enhanced by exceptionally strong clearing activity, with exceptionally high net treasury income. As of Q2 2022, of the €31.4M clearing revenue, LCH SA still contributes 19.6M of clearing revenue and treasury income received, while Euronext clearing contributed €11.5-11.8M. Borsa Italiana also reduces total cost by €40-45M from collaborations.

Due to the European expansion of CC&G clearing activities and the migration of Euronext’s Data Centre, Euronext’s management have targeted 2024 pre-tax run-rate to increase by 67%, to €100 million, with total implementation costs estimated at €160 million.

Stéphane Boujnah, CEO and Chairman of the Managing Board of Euronext:

“We are determined to leverage Euronext’s integrated value chain, by seizing the opportunities linked to the Borsa Italiana Group’s integration, notably through the European expansion of CC&G clearing activities and the migration of our Core Data Centre to Italy.

The integration of the Borsa Italiana Group teams within Euronext is going very well. Strengthened by its new scale, Euronext will build upon its position as a leading listing and trading venue and will pan-Europeanise its CSDs, to provide an enhanced offering to clients and grow further.

The Group will continue to look for external diversification opportunities, in line with its investment criteria.”

Migration of the Core Data Centre to Italy—Transfer of core data center from Basildon, U.K to Bergamo— Italy allows for proprietary trading platform Optiq to thrive

Euronext announced in April 2021 the strategic decision to migrate its Core Data Centre (Aruba cloud data) center from Basildon, in the United Kingdom, to Bergamo, in Italy with the first part set for completion on June 2022.

The migration is a response to Brexit to relocate Euronext’s Data Centre in an E.U country where Euronext operates a large business. This data center that handles a quarter of all European trading volumes through a single order book, with migration timed for the Borsa Italiana cash equity and derivatives markets to be on the Optiq trading platform by mid-2023, subject to regulatory approvals. Optiq powers a single liquidity pool, offering issuers increased international visibility, while Italian brokers and investors will have access to 7 European countries.

Growth comes from non-volume business; Average Daily Volume has remained quite consistent for the past decade; the number of listings is not the only factor for future prospects

Euronext’s revenue has jumped threefold from 500M in 2015 to 1.5B in 2021, but average daily volume has not grown much despite Borsa Italiana bringing new volumes. Borsa Italia benefits from lower average size and gets diluted the average size of a trade gets diluted. In 2019 to 2020, excluding Borsa Italiana, EuroNext was highlighting a 0.5 run rate and was anticipating a reduction in revenue capture. By 2022, Euronext is still above 0.5.

Why are average fees trending down? It is because clients are keeping their accounts but trading less.

Custody/Depository (CSD) (15-17%)

Euronext has the 3^rd Largest CSD (Central Securities Depository) Network representing €6.3 trillion in assets under custody, with €120M annual settlement instructions and more than 7,700 issuers. A €30.2M settlement generates €62.5M in revenue.

For Euronext’s 4 CSDs, they have 2 different account management models.

One is used in Italy and Portugal, which uses an omnibus account, and it is the custodians on clients who are managing the relationship with retail. In Denmark and Norway, the CSDs have a direct management of the account.

Euronext will combine its four CSDs brands into Euronext Securities, a new umbrella brand for its CSD business. From Euronext’s earnings calls, management has noted that future growth in custody and settlement will come from tax reporting services in Norway or additional data services.

Advance Data Services (14%)

Euronext’s Advanced Data Services business will scale up through cash equity data in Europe, its fast-growing index franchise (further deepen its relationship with ETF issuers and asset owners), and new datasets from acquisitions and building on leading quant capabilities tailored to end-user client segments. In addition, Euronext will also monetize non-public proprietary data and extend its expertise to new datasets from recently integrated businesses, such as fixed income.

Listings (14-15% of total revenue)

#1 Equity Listing Venue in Europe

Euronext is the leading equity listing venue in Europe with approximately 1,900 to 2000 issuers representing €6.5-6.9 trillion of aggregated market capitalization with 212 new listings in 2021, raising €26 billion. By the first quarter of 2022, both equity and debt markets raised a total of €325 billion. Euronext’s primary markets has raised 1.1billion, which represents more than 50% of total money raised in Europe.

Euronext is Europe’s leading venue for technology companies, with over 700 issuers. There have been 19 new listings recently, mainly in technology and innovation. 50% of all listings are now technology companies.

Competitors for listing

25% of all equities traded in Europe are on the Euronext platform. Competitors in Europe include— LSE, ICE, CBOE, DB.

When looking at other European listing platforms since the beginning of 2022 to July, there have been 41 listings in total, with 19 from the London Stock Exchange, and 3 on Deutsche Borse. For international listings, Euronext had 10 out of 31, whereas there were only 4 out of U.K listings at LSE and 2 at DB. Locally, LSE may have an advantage, but international, i.e, listings from companies that are not from issuers that have their legal headquarters within Euronext countries, still prefer Euronext. Even though Euronext is listed on French stock exchange it is tax resident of the Netherlands. Accordingly, a 15% Dutch withholding tax applies.

CBOE has been increasing market share in overall Europe for a long time but if you read Euronext’s annual reports you will see that in the countries where it operates it is Euronext who has been increasing market share. CBOE may be increasing share in European countries, but not at the expense of Euronext.

Leverage scale as the leading European trading venue

#1 Cash Trading Venue in Europe (58-62% of trading revenue, 20-21% of total revenue)

Euronext operates seven regulated markets and is the number one European cash equity trading venue, with €11.7 billion of cash ADV, representing a quarter of European volumes. Euronext has shown a unique track record in the management of cash trading market share and value extraction.

#1 Listing ETF Venue in Europe

3679 ETFs listed at the end of March 2022.

#1 Debt Listing Venue Globally (Fixed Income is 15-19% of trading revenue, 5-6% of total revenue)

Euronext is also the world’s leader in debt listing with 52,000 listed bonds from 4,200 issuers, with continuous growth coming from ESG bond listing franchise.

International expansion of MTS

Euronext announces the purchase in cash, of the technology business currently powering MTS, a leading fixed-income trading platform, Nexi (formerly called Monte Titoli) for €57M.

Nexi, the leading PayTech in Europe, has been a partner of choice of MTS and Euronext Securities Milan for more than 30 years. With this Transaction, Euronext internalizes the core trading platform of MTS and its largest IT contractor. Consolidation of MTS leads to strong repo trading volumes. MTS cash revenue was at €16.6M and MTS Repo revenue at €5.4M.

This makes Euronext number one in Italian repo trading, number one in Europe for Dealer-to-Dealer (D2D) European Government bonds trading and number three in Europe for Dealer-to-Client (D2C) European Government bonds trading. Euronext has also proposed to the European Commission the use of the MTS platform for the secondary market, and transparent negotiation, of bonds issued within the Next Generation EU recovery program.

Euronext will strengthen its leading position in D2D, through extended geographical reach and an expanded offering with new services. Its buy-side reach will expand through MTS BondVision together with an added-value data offering. MTS will expand across the full value chain, by exploring opportunities to deploy new and existing solutions to meet the needs of its clients.

Crypto Assets exposure

After the recent success of cryptocurrency ETPs listings, Euronext will continue to expand its offerings through a new family of Euronext branded crypto indices with the same level of regulatory security and operational efficiency as on Euronext’s core markets.

ATS and Corporate Services

Over the past decade, Alternative Trading Systems (ATS) have taken a growing amount of market share from each European country. Over the past 3-4 years however, there has been a halt, with most incumbent exchanges stabilizing market share at 50-65%.

While this continues to be a risk in the context of continuously changing regulation, incumbent exchanges, and Euronext in particular, have some structural advantages in each of their markets, such as opening and closing auctions with higher-quality market depth and a variety of market participants, making further share loss unlikely.
 

Euronext’s capitalization— Debt and financing

Euronext expects to achieve €100 million of run-rate pre-tax synergies related to the Borsa Italiana acquisition by 2024, up 67% compared to the €60 million of synergies announced at the time of the acquisition, to incur €160 million of restructuring costs, of which half will be in operating costs and half in exceptional costs. The upgraded synergies mainly result from the expansion of CC&G clearing activities and the migration of the Core Data Centre. More than 55% of those synergies are related to growth projects (non-volume).

Management exited a swap Euronext had on their €500M inaugural bond. This means that all debt financing is on competitive terms with interest rates fixed. Euronext is currently at 2.3x net leverage.

20 basis points of net interest margin once Euronext’s portfolio has been disposed of.

To clarify Euronext’s net interest income, they are charging 20bps (0.2%) as a base, and with a €20 billion cash balance, which makes approximately €40 million a year.

Financing and Outstanding debt issued

Amount                 Maturity       Interest

€500 million         2025                 Fixed

€600 million         2026                 Fixed

€750 million         2029                 Fixed

€600 million          2031                Fixed

€600 million          2041                Fixed

Capital Allocation/ Acquisition Strategy

Euronext has an investment committee which meets for 4 hours every month. This committee has justified that the price bid for BME could not justify the value creation and has been intelligent and shareholder oriented enough to let SIX pay the overly expensive price. SIX confirmed in a statement it had acquired 93.16% of equity share capital in BME for €2.6 billion at €32.98 per share.

 Euronext has been acquiring companies with a consistent and disciplined approach:

1. To expand infrastructure so that there is an increase to a single—

1. Liquidity pool
2. Order book
3. Order platform (OPTIQ)

2. Diversify revenue streams so that revenue will not be volatile due to equity markets

Since the IPO in June 2014, Euronext has grown enormously. After the acquisition of the Irish Stock Exchange in 2018 and Oslo Børs VPS in 2019, management diversified and expanded through the acquisitions of Nord Pool and VP Securities in 2020 and the Borsa Italiana in 2021.

Valuation

Of Euronext’s €1.25-1.3B in exchange revenue, 80-82% of revenue is derived from Norway, France, Italy, and the Netherlands. An annual cash flow of €600-800 million is generated by Euronext, with operating margins fluctuating from 45-50% annually.

For Euronext, about 75-85% of operating earnings becomes free cash flow every year. The conversion of Euronext’s operating earnings into cashflow is affected by working capital and their dividend payment. If you exclude the impact on working capital from Nord Pool and Euronext Central Clearing Party activities, net operating cash flow accounted for 42% of operating earnings. Capex is fixed at between 3% and 5% of revenue.

Despite having a committee make decisions over acquisitions, as seen with BME, Euronext is not trigger happy and will not pull the trigger for the sake of expanding if the price and the integration does not make sense. With a new clearing house, a dominant Optiq platform, and new data center in Italy; Euronext is a reasonably priced long-term compounder with stable dividends at a multiple of approximately 13-16x market capitalization to free cashflow.

Catalyst

- growth from vertically integrated segments such as clearing and settlements, custody

- growth from acquisitions

- Optiq platform integration with Borsa Italiana

- Bond platform improves through Nexi acquisition and MTS