Description

Instinet, as I'm sure you all know, provides agency and brokerage services to broker dealers and financial institutions. Pretty straightforward business, electronic trading matching. It is a publicly traded subsidiary of Reuters PLC, which retains approximately 80% of the equity. This is a pretty well known situation but its been a slow month for ideas on VIC, and I'm curious as to why this one hasn't been discussed before.

The situation is as follows.
EPS
1997 0.68
1998 0.77
1999 0.66
2000 0.72
2001 0.63

EPS is likely to decline again in 2002

Revenue (millions)
1997 714
1998 842
1999 969
2000 1435
2001 1496

Shareholder Equity of 5.89/sh, no long term debt, goodwill is about 58 cents/share. Cash is about 2.80/share.

Net of all cap-ex, free cash flow in 2001 was 0.49/share

the point being there are no comps right now that are this low in broker dealer services.

What is wrong:
Obviously, INET has been losing market share to Island, and to the new order book at Nasdaq, and they also have other outfits like ITG and now this new startup NYFIX coming after them. In other words, barriers to entry low, plus extreme competition plus commodity-like service = falling margins. Plus trading volumes are way down from the peak of the bubble. But my question: is this a show stopper at or near tangible book value? Say at 6 where it was two days ago? This is not necessarily a business that requires a lot of new cap-ex the next few years and they still remain the largest electronic trade forum on volume. Plus they are better positioned for EU than anyone, and possibly better positioned than anyone for asia. Other people trade equities other than us stock-obsessed americans.

Catalyst

Reuters could buy this back ala TD Waterhouse last year. Solid unleveraged balance sheet could mean that another institution could also make an offer. Looks to me that INET has excess cash as well as free cash flow potential despite margin compression and trading volume reductions. Downside looks limited unless they make some major strategic blunder that impairs capital.