New Zealand exchange NZX is currently in discussions with OTC data specialist Markit to sell its wholly owned carbon registry business, TZ1 Registry, to the vendor. According to a spokesperson from Markit, discussions about the sale have been ongoing for four months and the deal is still awaiting formal board approval.
TZ1 Registry is the arm of the wider TZ1 carbon market business that records the generation, purchase and retirement of voluntary, or non-Kyoto, carbon credits.
Under the terms of the proposed transaction, NZX will sell Markit 100% of the shares of TZ1 in exchange for consideration payable in Markit shares. The vendor hopes to have completed the acquisition in the first quarter of this year, following board approval and the completion of bilateral due diligence.
“Markit is very strong in credit, fixed income, equities, rates and commodities, but the emissions markets are relatively new to the company. We are keen to diversify into the environmental arena. The reason for the acquisition of TZ1 is because we see a registry as a core part of the infrastructure of a developing market,” the Markit spokesperson explained in an interview with Asia Markets IT.
According to NZX CEO Mark Weldon, the exchange initially considered retaining TZ1 as a 100% owned subsidiary and growing the business from New Zealand, but found Markit’s offer hard to turn down. “The opportunity to cement a transaction with Markit that retained a meaningful economic interest for NZX in the TZ1 Registry business, and to combine that with Markit’s global reach and distribution networks, was compelling,” he explains.
The Markit spokesperson adds: “The acquisition of the TZ1 Registry will allow Markit to bring greater transparency and efficiency to the fast growing carbon and environmental markets. It will also form the bedrock of our strategy for data, valuations, indices and processing for these markets. In terms of customers, there is very limited overlap – the majority of TZ1 clients will be new relationships for Markit.”
Lance Uggla, CEO of Markit, reckons the vendor will be able to provide the carbon trading market with a trusted source of data for the trading of environmental products and increase transparency in this market.
“Ultimately, this deal will allow us to develop a robust commonly used registry, which will provide consistency and transparency to this asset class,” adds the spokesperson.
TZ1 CEO Mark Franklin feels it is the right deal, at the right time, and is confident that TZ1 will continue to deliver real economic value to NZX through to the final payout at the end of 2011. NZX and Markit will share equally TZ1 Registry’s net profits for the next three years, with any losses being carried by Markit.
According to Franklin, the Markit shares NZX will receive have been independently valued at US$35.91 million. If the business does not meet expectations, NZX will have to return shares to Markit in order to provide it with a residual value of US$19.95 million. However, if it exceeds expectations, NZX will receive a further payment of up to US$17 million.
“NZX has a positive view of the long-term financial prospects of Markit and its business model. Whilst the structure of this transaction will deliver short and medium term value to NZX, we also believe NZX will derive ongoing value from the Markit relationship,” adds Weldon.
The acquisition should pose no integration challenges for Markit, the spokesperson confirms: “We would expect a smooth, quick integration since this is a new business for Markit and consequently has no need for integration with our existing businesses.”