Nasdaq Down 10% in Wake of eSpeed Purchase

Nasdaq OMX Group (NDAQ) is having a rough day, with its stock down more than 10% in latest trading.

The move down comes after Nasdaq said it has agreed to buy an electronic Treasurys marketplace from BGC Partners for $750 million in cash plus stock, a deal that could reach as much as $1.2 billion. After the announcement, analysts at Evercore downgraded Nasdaq’s stock to equal-weight:

We appreciate the desire to diversify asset classes and the opportunity that this platform/asset class may provide given longer-term structural catalysts. But this deal represents a divergence from the recent strategy of building up non-transactional businesses, with a focus on returning capital to shareholders. We suspect investors will perceive this as the beginning of a longer-term shift to building out the transactional businesses through M&A. While the leverage as a result of this deal will preclude any deals in the near-term, we believe the market perception around further M&A will negatively impact the multiple and the stock is likely to be dead money in the near-term. Longer-term, we believe this deal creates an interesting opportunity for NDAQ, but for now we prefer to sit on the sidelines.

Analysts at Sandler O’Neill kept their Buy rating on Nasdaq, but saw that this deal comes with a cost beyond the purchase price:

NDAQ expects its debt to EBITDA ratio to reach 3.0x+ with the acquisitions of (1) Thomson Reuters [investor relations and PR unit] ($390 million purchase price of mostly debt) and eSpeed (~$750 million in debt). Therefore, NDAQ will focus on paying down debt and bringing its leverage ratio to ~2.5x, which they expect should take ~12 months…we note that Moody’s placed NDAQ’s investment grade credit rating on review for a potential downgrade given the ~$1 billion in incremental debt the exchange will take on for the TRCS and eSpeed transactions and resulting changes in financial ratios.

As Sandler points out, Nasdaq’s stock has done well this year — even after today’s move it’s up 15% in 2013.