The IPO market continues to pick up steam, with the latest
piece of evidence coming this morning, as fixed income and derivatives trading
company Tradeweb Markets (TW) sharply boosted the size of its IPO.
Specifically, it lifted the deal size to 36.25 mln shares from 27.3 mln,
representing an increase of nearly 33%. Given the magnitude of the increase, it
is safe to say that demand is very healthy for this deal, which is both a
testament to the improving conditions in the IPO market as well as to TW's
Before diving into TW's financials, first some background regarding the IPO itself. The deal is expected to price within a $24-26 price range while opening for trading Thursday morning on the Nasdaq. Last year, Blackstone Group (BX) acquired 55% of Refinitive -- formerly the financial and risk business of Thomson Reuters -- for $17 bln. Tradeweb Markets is currently 54% owned by Refinitive, with the rest held by several banks. Following this IPO, Refinitive will continue to own about a 70% controlling stake in TW.
All 36.25 mln shares will be sold by TW, and the company plans to use the estimated proceeds of $854 mln to purchase outstanding LLC interests from certain bank stock holders at a purchase price equal to the IPO price. Even though TW lifted the deal size, we still consider 36.25 mln shares to be fairly light for a company that could be valued in excess of $3 bln after the IPO opens for trading. Combine this thin float with the tier one underwriters behind the IPO, including Goldman Sachs, Morgan Stanley, JP Morgan, and Citigroup, and the conditions look ripe for a substantial opening gain.
TW owns and operates a leading electronic platform that facilitates trading for credit, interest rate instruments, money market, and equity assets. Its clients mainly consist of asset managers, hedge funds, insurance companies, banks, and brokerage firms. In 2018, its average daily trading volume exceeded $549 bln. From a geographic basis, it serves over 2,500 clients across 62 countries.
A couple of TW's primary competitors are ICE and CME, each of which have been experiencing improving top-line growth rates. ICE in particular has been a strong performer with shares in the midst of an impressive multi-year run, up 175% since early 2013.
A key growth driver for ICE, and for others in the electronic trading industry, has been acquisitions, as consolidation has been a major theme over the past few years. For instance, ICE recently acquired BondPoint, IDC, and TMC Bonds, bolstering its portfolio of fixed income products. TW itself has also been active in the M&A arena, buying CodeStreet in 2016 to expand on its predictive analytics capabilities.
TW believes that a couple main drivers will continue to provide a tailwind to its business. For instance, trading volumes in asset classes like U.S Government bonds, ETFs, and Chinese bonds continue to grow, with these markets also migrating towards electronic trading platforms. Based on industry sources and management estimates, the company estimates that the addressable average daily trading volume across the rates, credit, money markets, and equity asset classes has grown at a CAGR of 8% from 1H15 through 1H18.
Also, after a prolonged period of historically low interest rates, trading volume in its rates asset classes may benefit from interest rate normalization to higher levels.
TW's financials are solid overall, offering a mix of growth, profitability, and cash flow generation. For FY18, the company generated net revenue of $657.6 mln, up 30% yr/yr. Driving this growth was a healthy boost in average daily trading volume across its main asset classes: Rates +40% to $355 mln; Credit +67% to $12.7 mln; Equities +63% to $7.8 mln; and Money Markets +31% to $173.7 mln.
Adjusted net income jumped by 32% to $51.9 mln and free cash flow was up 38% to $253 mln.
The company does plan to pay a modest quarterly dividend of $0.08/share, equating to an annualized yield of 1.3%, based on the mid-point of the $24-26 proposed IPO price range.