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Breaking News: DIFC Hires UBS to Explore Options for Sale of SmartStream

The investment arm of the Dubai International Financial Centre (DIFC) has hired UBS to handle the potential sale of SmartStream Technologies to a willing bidder. DIFC Investments is seeking to divest itself of several of its “non-core” investments before the end of next year, as indicated by the asset sale plan that it released in August, which indicates the investment hub is seeking to raise US$1 billion by the end of 2011.

The vendor, which is active in the corporate actions solution sector and operates reference data utility offering DClear (see details of its launch by the DIFC), has seemingly been put on the auction block due the financial pressure DIFC Investments has come under since the financial crisis. The Middle Eastern investment hub posted a loss of US$561.4 million in 2009 versus a US$842.5 million profit in 2008, as it wrote down the value of properties amid falling real estate prices in Dubai.

Moreover, Standard & Poor’s changed DIFC Investments’ outlook to negative following the release of the asset sale plan in August in order to reflect the “uncertainties about the timing and success of what we see as an ambitious disposal programme”. The ratings agency noted that the sale of non-core assets was a “positive step” but that it involves “execution risk”, one aspect of which will be the sale of SmartStream.

DIFC bought SmartStream from private equity firm TA Associates back in November 2007 for around £200 million  and it seems likely that it will return to this form of ownership in the near future. Much like the sale of Interactive Data earlier this year, SmartStream represents a prime opportunity for a private equity buy out due to the fact it is a cash generative business that doesn’t have a lot of debt. Certainly, a private equity firm, or firms, would be the most likely to have the funds available for a buy out.

However, other players in the market that are already active in the reconciliations, corporate actions or reference data space might be interested in a merger. The Depository Trust & Clearing Corporation (DTCC) has already bought entity data solution vendor Avox this year in a bid to improve its utility offering, could SmartStream be next?

After all, it could buy DTCC more credibility in the European and, particularly, the Asian markets due to SmartStream’s presence in these geographies. SmartStream expanded its Asia Pacific operations, which are headquartered in Singapore, with the opening of a new Tokyo office in October last year. If the DTCC is keen to extend its utility reach, a key acquisition with presence in these markets may help its cause; plus SmartStream’s DClear offering already purports to provide a reference data utility to users.

The London Stock Exchange (LSE) could also be a potential buyer, given its focus on the post-trade space, following the hiring of ex-Xtrakter CEO Kevin Milne to head this business in January. LSE has been investing in getting all of its reference data ducks in a row over the last couple of years with the move of most of its solutions onto the UnaVista platform. Could UnaVista and DClear be compatible offerings? Time will tell.

Another potential in the acquirer in the wings could be industry network operator Swift. Given its sudden bent towards acquisitions (as indicated by its acquisition of SunGard’s Ambit in July) and its focus on the area of trade matching, Swift may be interested in SmartStream’s solution set. Swift’s chief technology officer Mike Fish told Reference Data Review in July that it will be much more open to acquisitions than in the past and this could potentially mean it is open to bidding for a vendor such as SmartStream.

As for what SmartStream could offer Swift, the vendor’s reconciliations platform could prove appealing. The network provider is currently looking at initiatives in the matching services space and the area of post-trade pre-settlement as part of its 2015 strategy, after all. According to Arun Aggarwal, Swift’s managing director for the UK, Ireland and the Nordics, Swift is looking to expand its matching coverage sector-wise and geographically under his leadership. SmartStream’s corporate actions and reference data utility offerings could also potentially fit with the focus of the 2015 strategy.

Regardless of who buys the vendor, it will be interesting to see how a buy out will impact the vendor’s DClear offering, since it has already bagged its first client and is seeking to gain more traction in a market that is becoming increasingly fixated on the concept of a reference data utility. Earlier this year, DClear head John Mason left SmartStream to join reference data outsourcing solution vendor Netik and a replacement has yet to be announced. The future success of the endeavour could be predicated on a potential buyer taking up the mantle of a utility approach to market.

SmartStream has made no public comments about the buy out; so it will be up to Reference Data Review to provide the details, once any potential bidders have declared an interest, check back soon…

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