Rival's threat may cloud Instinet IPO
Reuters' plans to sell off part of Instinet in tough market conditions show how seriously the media company is taking the threat of competition from Nasdaq's SuperMontage.
Reuters' intention to press ahead with a partial flotation of its electronic brokerage unit Instinet, in what remains an uncertain market for IPOs, demonstrates the competitive threat likely to be posed by Nasdaq’s rival platform SuperMontage.
Analysts were intrigued at the timing of yesterday's announcement by Reuters that it intends to float part of the business on Nasdaq by the middle of June. It came only a short time after Nasdaq gained approval from the US Securities and Exchange Commission for its new-order display platform SuperMontage and only five days before Reuters' full-year earnings report.
SuperMontage is expected to be launched early next year, and analysts said it provides a lot of uncertainty for Instinet - currently the biggest electronic communications network for US stocks but recently losing ground to rivals. SuperMontage is seen as part of Nasdaq’s expected move towards an independent group with a pure focus on profits.
Analysts fear that the threat posed by SuperMontage will further undermine an IPO at a time when markets are being pumped full of new technology paper. The decision by France Telecom to slash Orange's flotation price offers the most recent evidence of the sickly IPO market, while a number of other telecoms groups are also looking to slash debt by spinning off various parts of their business.
Richard Harwood, analyst at stockbroker Gilbert Eliott, said Reuters’ IPO timing didn’t appear to be the best, with the TMT market still vulnerable to a shakedown between now and the middle of the year. But with Instinet looking to expand in the US, most likely by snapping up similar players, Reuters’ management is trying to keep the Instinet management happy by giving the business the means to make these acquisitions.
Harwood said recalculations would have to be made for the group’s valuation, which Goldman Sachs today reduced by 75p to 1140p on a sum-of-the-parts basis. Goldman now values Instinet at around US$3.5bn, compared with its previous estimate of US$5.1bn. The IPO is expected to raise US$450m for Reuters, with analysts expecting around 15% of Instinet to be floated.
Goldman Sachs said Tuesday’s results from Reuters should outline a strong core trading picture, with the information division continuing to deliver 8% underlying revenue growth and a faster recovery in trading solutions. Gilbert Eliott’s Harwood has forecast profits before tax for the full year of £570m against £530m in 1999, which he said would be a respectable performance as a lot of companies have had a disappointing year. He said the shares are trading on quite a high multiple, with a p/e ratio of 27 (adjusted for Tibco), although he is looking to buy Reuters shares below £10. |
