Philadelphia Exchange eyes IPO, M&A

By Megan Davies

NEW YORK (Reuters) - The Philadelphia Stock Exchange may shoot for an initial public offering in late 2006, early 2007, but is also considering going down "the M&A track", its chief executive said on Tuesday.

Meyer "Sandy" Frucher, Philadelphia's chairman and chief executive said that late 2006/early 2007 was "a reasonable target" for an IPO, but stressed that "we're not wed to an IPO any more than we're wed to an M&A deal".

"We are obviously going down two tracks," said Frucher, speaking at the Reuters Exchanges and Trading Summit in New York.

"We are certainly looking at the IPO track and we are also looking at the M&A track -- I would not lie to you and say that we have not had conversations with people. Everyone in this business is on the same merry-go-round."

Frucher sees a "lot of pressure" to consolidate options markets from the current six players.

He also said he sees a jump in profits at the exchange in 2006, as a result of new technology and strategic alliances struck last year with banks. He sees operating income of $25-27 million in 2006, against $3-4 million in 2005.

Founded in 1790, the exchange, known as the "PHLX" converted to a for-profit entity in 2004 from a member-owned organization, freeing the exchange to form strategic alliances with other markets or potential partners.

Last year it struck investment deals to sell stakes to six major players from the securities industry including: Morgan Stanley MWD.N, Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co. Inc. MER.N. Those deals included warrants, which if fully exercised, would mean all six investors own an aggregate 89 percent stake in the exchange.

Frucher expects the transfer of ownership that take the banks up to that stake to happen in July.

"They all have until the end of June to qualify to exercise their warrants. Most of them have, so in July there will be a further transfer of ownership," taking their stake to nearly 90 percent, Frucher said.

The PHLX said at the time that the investments would help the exchange develop in the cash equities and futures trading market and was also a "validation" of its options business.

Commenting on recent investor demand for the exchange sector, Frucher said, "In today's market, we are probably pretty close to the top of a very exuberant marketplace." That is putting pressure on the Philadelphia exchange to move faster in terms of a possible IPO.

"If you catch the bubble, you're a lucky person, but I think there is a lot of market exuberance," he said.

Frucher also expects the exchange's options floor to close within the next couple of years as electronic trading takes over.

In January, the exchange said it planned to eliminate floor trading in equities and move to a fully automated platform by mid-year to conform to U.S. market structure requirements.  Continued...