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Is ASX Limited a buy?

Shares in the stock market operator, ASX Limited (ASX:ASX) have lost more than 7% in mid-afternoon trade, to trade at around $33.09. The company is now trading at prices last seen in January 2013, and is sporting a dividend yield (fully franked) of more than 5%.

The reason for the fall appears to be the company’s recent 2 for 19 renounceable rights issue, which will dilute shareholders, unless they take up their rights. That means kicking in some extra cash into the company, at $30 a share. Some shareholders may not want to do that, and may be selling off their shares. It also means the dividend per share will likely fall from 96 cents to around 81 cents per share.

The ASX was seeking to raise $553 million, from both institutions and retail investors. Today the company announced that 96% of institutional shareholders had taken up their rights, with the remainder sold off to other investors. The institutional component has raised $267 million, while the retail component of the offer opens next Monday 17 June.

The funds will be used to replace an existing $250 million debt facility for ASX Clearing Corporation, a subsidiary of the ASX, while $200 million will be contributed to ASX Clear (Futures). The additional capital will enable ASX Clear (Futures) to meet higher international capital standards for clearing counterparties, while the remaining $90 million will be used to fund “unspecified” current and future growth initiatives.

In June last year, the ASX confirmed that it was considering buying share registry company Link Market Services, at a cost of close to $1 billion. Link is a competitor to Computershare Limited (ASX:CPU) and Advanced Share Registry (ASX:ASW). No deal has been announced since then, and it appears to have been dropped. It seems unlikely that the ASX will make a full takeover bid for market software provider, Iress Ltd (ASX:IRE),in which the ASX currently holds 19%. Iress is currently value at more than $1 billion, and would be a big bite for the ASX to take.

Some analysts have also questioned the move to replace cheap debt, with relatively more ‘expensive’ equity, and speculation has now emerged, that the ASX could be ‘pimping itself up’ to be more attractive to potential overseas buyers.

Foolish takeaway

At current prices, ASX may be an opportunity to pick up a quality company, paying decent fully franked dividends over 5% on the cheap. One for the watchlist.

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Motley Fool writer/analyst Mike King owns shares in Computershare.

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