CBOE Buying Bats Makes Sense, Just Not Strategically

While pointing out that the offer price was much less than what analyst Rob Rutschow estimated, the expected synergies from the acquisition confirmed the brokerage's fear about fewer synergies. Rutschow liked the company's preference of using debt for the acquisition.

The analyst sees two primary factors in favor of CBOE. One is the company could stop creating its next-gen trading platform vector as he expects the company spending about $50 million. This also has the potential of some elevated costs in the next two-year period. The second factor is that the company could effectively shun a fresh competitor besides tough pricing conditions in options.

Related Link: Buckingham Research Upgrades CBOE Holdings To Buy, Raises PT To $77

In a research note to clients, the brokerage said, "However, we feel that the addition of BATS' franchise makes CBOE a much less attractive target (particularly to CME), which could result in the combined firm losing some of the merger premium CBOE enjoyed previously (which was a 3–6 PE point premium to CME)."

CLSA believes this would drag down pro-forma PE from 23x to 20x the pro-forma earnings mix. Though the firm expects the combination to report adjusted EPS of nearly $3 in 2017 compared to its estimate of $2.55 for CBOE, the brokerage does not expect much improvement in the following years.

At time of writing, the stock traded at $67.00, up $0.41, or 0.62 percent.

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