From Friday’s Globe and Mail
Talk of a possible takeover of the American Stock Exchange is hardly news to Tom Caldwell. In fact, it’s just the sort of thing he’s counting on.
“I think Amex is going to get taken out by someone. It’s just a question of who,” said the Canadian investment veteran. He said that while a deal would make sense for rumoured suitor NYSE Euronext Inc., the owner of the New York Stock Exchange, “it would also be logical from [TSX Group Inc.’s] point of view.”
Mr. Caldwell isn’t just saying this as a casual observer. He is president, lead investment manager and controlling shareholder of Urbana Corp., a closed-end investment fund that specializes in the securities market business. It owns pieces of Amex, NYSE Euronext, TSX Group and 15 other securities exchanges spanning the globe.
Urbana has been aggressively expanding over the past year, seeking to capitalize on the rapid changes happening within the securities market industry. Market providers in growing numbers have been moving away from non-profit structures to become publicly traded entities, an evolution that has been accompanied by a wave of consolidation within the industry.
Urbana has been riding that wave, using a series of share offerings last year to finance an expansion of its portfolio around the world. Just a year ago, the company held a modest $34-million (Canadian) in assets, consisting of a pile of shares in NYSE Group Inc. and not a whole lot else. Today, its assets total almost $270-million. And it wants to get a lot bigger.
“We’ve caught a unique time frame in the exchange world,” he said. “Our goal is to build a billion-dollar-plus company owning significant parts of major exchanges throughout the world.”
And he figures this will have to happen in the next five years – the time window he foresees for this transformative phase of the industry.
“We’re in a race,” Mr. Caldwell said. “We would like to go as quickly as possible, because there are a finite number of properties. We’re working against a very tight time frame, in my mind.”
Up until 2003, Urbana was just a shell company in search of a purpose within the Caldwell financial empire. Then the Caldwells began buying up NYSE seats in anticipation that the exchange was headed toward demutualization, and Urbana became a convenient entity in which to hold some of those seats. In mid-2005, Urbana formally changed its listing status on the TSX Venture Exchange from a mining company to an investment company, and early last year the “new” Urbana graduated to the Toronto Stock Exchange. When the NYSE completed its IPO in the spring of 2006, generating a return of nearly 400 per cent on the seats held by Urbana, “an investing concept was born,” said Cormark Securities Inc. analyst Jeff Fenwick, who recently became the first research analyst to initiate coverage on the stock.
Mr. Fenwick rates Urbana’s widely held class A shares a “buy” with a 12-month target price of $6.50, almost 40 per cent above their current price. He likes the rapid growth among stocks in the industry (the FTSE/MV Exchanges Index has surged 55 per cent annually over the past five years), the continued trend toward IPOs and consolidation, Urbana’s strategy of identifying exchanges that are early stage candidates for demutualization, and its increasing focus on high-growth emerging markets.
He estimates that Urbana’s existing investment portfolio is poised to grow 27 per cent in value by the end of 2008. And that doesn’t account for acquisitions of additional holdings – something that has become a constant for Urbana.
Mr. Caldwell said Urbana will likely go back to the market for additional financings “in the near future,” given that the company has only $6-million in cash left from its $75-million share issue last summer. He said the company is also on the verge of closing an agreement with Bank of Montreal for a $50-million credit line, which will give it more flexibility to respond quickly when opportunities to purchase assets arise.
One of its favourite purchase targets recently has been Amex, on which Urbana began accumulating seats last summer after the exchange enlisted an investment bank to advise it on demutualization and other potential strategic alternatives. It now holds 25 seats valued at more than $9-million. Mr. Caldwell believes Amex could eventually sell for something in the range of $400-million (U.S.) to $450-million, well above the $350-million quoted by unnamed sources in a Wall Street Journal report Wednesday.
Urbana has also been accumulating seats on the Chicago Board Options Exchange, where membership values have surged since the CBOE last year began the process of demutualization, widely considered a precursor to an eventual IPO. Urbana holds 18 CBOE seats, which are now selling for more than $3-million apiece, almost double their price of a year ago.
The company has also been building its ownership in the Bombay Stock Exchange, which recently demutualized, but hasn’t yet sought a public stock listing. Mr. Caldwell likes the market’s growth potential as one of the biggest of the world’s emerging economies.
“I still like emerging markets,” Mr. Caldwell said, adding that stock markets, due to the diversity of their underlying listings, “are an excellent proxy for an economy.” Within the emerging markets, he said, India looks particularly attractive, due to the strong rule of law in place in the country.
“To my mind, India is really the place,” he said. “They get it.”
Exchanges fuel Urbana gains
Urbana (URB.A-TSX)
Yesterday’s close: $4.50, down 19¢
