This deal could finally reawaken the IPO market — here’s what you need to know

The initial public offering freeze could finally be coming to an end.

Bats Global Markets — a stock exchange operator giving the NYSE and Nasdaq a run for their money — is set to go public on Thursday.

Shares are expected to price between $17 and $19. At the midpoint between those, that would mean a $202 million offering — the largest IPO of the year, and the first with positive operating income, according to Renaissance Capital’s IPO Center.

“We’re excited to get the IPO market open for both of us, which we both benefit from,” CEO Chris Concannon told investors in a roadshow presentation.

Last quarter, IPO activity hit its lowest level since the first quarter of 2009.

There were just nine IPOs in the US throughout the quarter, raising a total of $1.2 billion, according to Dealogic. That’s down from 33 deals worth $5.5 billion in the same period last year and 59 deals worth $10.1 billion in the same period in 2014.

Morgan Stanley and Citigroup are the lead underwriters on the Bats offering. Bank of America Merril Lynch, Credit Suisse, Goldman Sachs, JPMorgan, and a handful of other firms are also working on the deal.

Second attempt

The Bats deal — which will be listed on one of Bats’ own exchanges, the BZX Exchange, under the symbol BATS — is actually the company’s second attempt at going public.

Back in 2012, Bats had to withdraw its first IPO attempt after its own computers malfunctioned and kept its stock from trading. They also forced a circuit breaker in Apple’s stock that day.

But things are expected to go a lot more smoothly this time. Bats has listed 70 ETFs on its exchanges since then, and performs auctions daily in each of those securities. It had only listed 9 at the time of the first attempt.

It has also run more than 50,000 tests of the corporate auction mechanism in recent months, according to someone who attended the Bats roadshow presentation, and has tested the system up to nearly 3x the auction volume of Facebook’s IPO, the largest IPO in history.

Stealing market share

Here’s what you need to know about the company (via the investor presentation by Concannon and CFO Brian Schell):

  • Bats is the second-largest stock exchange operator in the US, after the NYSE. It holds a 21.1% share of the US equities market, ahead of Nasdaq’s 18.8% and behind NYSE’s 24.1% share.
  • It also operates the largest ETF market in the world. Bats holds a 26.8% ETF market share, ahead of Nasdaq’s 14.1% and NYSE’s 20.9%.
  • It operates the largest exchange in Europe — larger than the Deutsche Boerse and the London Stock Exchange. Its market share in the European equities market is 24.4%, ahead of the LSE’s 18.9%, Euronext’s 14.7%, and Deutsche Boerse’s 10.2%.
  • Bats has grown net revenue by 32% annually in recent years, 12% of which comes from organic growth. EBITDA has grown by 41%.
  • It’s highly efficient: Bats’ EBITDA per employee is $823,000. That operating scale allows it to provide competitive prices for its services.

Bats plans to grow in several strategic areas, including the US options market, the global FX market, and the ETF market.

Concannon said that one third of daily US equity market trading volume is made up of ETF volume, and he expects Bats to receive a greater share of the market as it grows.

That’s because it has upended the traditional ETF listing process. Bats does not charge listing fees, but rather pays companies to list with it. Instead, Bats gets paid out of the trading fees they earn from the deals.

Fifty-five per cent of Bats’ revenue comes from its subscription-based market data service. Revenue there has grown at a 30% rate, according to Concannon, but the service is still “substantially cheaper” than the competition.

The other way Bats has grown is through strategic acquisitions. It acquired Chi-X Europe in 2011, DirectEdge in 2014, Hotspot in 2015, and in 2016.

Room for growth

Going forward, Concannon sees a number of current market developments supporting future growth. Those developments include:

  • Heightened market volatility due to a plethora of macroeconomic and political factors
  • Consolidation in the industry creating competitive opportunities for Bats and potential strategic opportunities down the road
  • The shift toward ETFs as preferred vehicles for investing and trading
  • Continued demand for data
  • The favourable regulatory environment for on-exchange trading

Bats CFO Schell also outlined the company’s financial targets in the presentation. Those include:

  • A dividend payout of ~30%
  • A leverage ratio of 2.5x (it was at 2.9x at the end of 2015)
  • Organic revenue growth in the high single digits
  • Normalized EBITDA margins of 60-65%
  • Annual capital expenditures of $15-20 million

We’ll be back with live coverage of the listing.

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