After dancing for two months over the details and the structure of the deal, CME Group Inc. has agreed to acquire Nymex Holdings for $9.5 billion, which is approximately $1.5 billion less than the deal that was being pondered back in late January. The companies said the combined company will provide global market participants access to the "leading financial and agricultural exchange" and the "leading energy and metals exchange" in a regulated, transparent marketplace distributed around the world through the "enhanced speed and capacity" of the CME Globex electronic platform.
The deal will bring together CME Group's Chicago Mercantile Exchange and Nymex Holdings' New York Mercantile Exchange (Nymex). The companies said Nymex customers will benefit from a single point of contact from trade matching through clearing and that CME Group will continue to offer multiple venues for execution, including trading floors in Chicago and New York and clearing on the Nymex ClearPort platform, as well as electronic trading on CME Globex, which is available to customers worldwide virtually 24 hours each trading day. The combined company said it will continue to operate a trading floor in New York City as long as both revenue and profitability thresholds are achieved going forward.
"This strategic combination with Nymex, the premier exchange in energy and metals derivatives trading, continues both of our companies' traditions of finding innovative ways to create value for our customers and shareholders," said Terry Duffy, CME executive chairman. "This agreement builds on our existing trading technology agreement announced in April 2006 that has allowed customers around the world to benefit from access to Nymex's benchmark energy and metals products. Since coming onto the CME Globex platform, average daily volume of Nymex products on CME Globex has increased to nearly one million contracts. Through this combination, we will be better able to generate synergies between our exchanges to provide increased efficiencies and new trading opportunities for customers around the world and create new long-term value for our shareholders."
Nymex Chairman Richard Schaeffer added, "Nymex shareholders and customers have benefited greatly from our existing technology services agreement with CME Group, and this transaction allows us to take the business and our growth to a much higher level. CME Group has excellent potential for strong future growth, and our careful review of the various options available to Nymex for enhancing long-term shareholder value concluded that this transaction is the best path for Nymex customers and shareholders alike. We are excited by the unique opportunities this combination creates for us to continue to build our business internationally, further improve cost efficiencies and trading opportunities, and grow shareholder value."
Merger talks, which began in late January, reported the deal would likely be an $11 billion acquisition (see NGI, Feb. 4). The value of the deal declined over the last month and both companies' stock prices took a big hit in February as a result of a Department of Justice finding that financial futures exchanges that also act as clearinghouses, are barriers to competition (see NGI, Feb. 11).
"The deal really does not surprise me," said Steve Blair, a broker with Rafferty Technical Research. "Any of the members who are still holding on to their full 90,000 shares is going to walk away with more than $9 million in value." With shares prices at $100.30 per share, the deal is valued at about $9.48 billion, based on roughly 94 million shares outstanding as of Feb. 20.
Blair noted that while Nymex floor trading has rapidly been losing volumes to electronic trading, the merger might be floor trading's last stand. "Out of 120,000 natural gas trades, only 10% is currently being done on the New York Trading floor. Similarly, out of 600,000 or 700,000 crude deals, only 100,000 is being done on the floor," said Blair. "One the one hand, you really have to wonder how long the floor will remain economical, but then again the CME floor in Chicago still exists."
Looking at the impacts of the deal, Commercial Brokerage Corp.'s Tom Saal said he doesn't see too much change ahead for the markets. "Initially, I don't think it means much to the futures business," he said. "Nothing will likely change in the short term. Globex is owned by CME -- and that is where a lot of the Nymex trading already is." In April 2006, Nymex solved the dilemma of how to take its electronic energy trading to a round-the-clock schedule by inking a deal with CME to list Nymex contracts on CME's Globex platform (see NGI, April 10, 2006). Nymex went live on Globex in June of 2006 (see NGI, June 12, 2006).
The combination will further diversify the company's revenues, with products in every major asset class. Nymex and CME said the deal will also better position the company to compete globally with other cash, over the counter (OTC) and regulated markets. The transaction also is expected to deliver significant customer benefits through clearing capital efficiencies related to equity holding requirements, portfolio margining and security deposits for joint clearing members. Additional benefits will include harmonized trading and administrative technology systems, building on the existing CME Group/Nymex exclusive electronic trading agreement.
Under the terms of the definitive agreement, shareholders of Nymex will receive total consideration equal to 0.1323 shares of CME Group Class A common stock and $36 in cash for each share of Nymex common stock outstanding, or an aggregate of approximately 12.5 million shares of CME Group Class A common stock and cash of $3.4 billion. Nymex shareholders will hold approximately 18.6% of the combined company on a pro forma basis. Shareholders of Nymex can elect to receive either CME Group Class A common stock or cash for each share of Nymex common stock. The exact amount of the cash and stock consideration to be received by each Nymex shareholder will be determined by proration in the event that total cash elections are either greater than or less than the mandatory cash component of approximately $3.4 billion. CME Group may choose to increase the cash amount if Nymex shareholders elect to receive more than $3.4 billion in cash, under certain circumstances.
The companies said the strategic combination is expected to create substantial value for shareholders through the realization of approximately $60 million in cost synergies and additional compelling growth opportunities. As part of the transaction, Nymex is required to offer to purchase the 816 outstanding Nymex Class A memberships for consideration not to exceed $500 million in the aggregate, or approximately $612,000 per membership. The closing of the transaction will be conditioned on, among other things, at least 75% of the memberships being repurchased.
"CME Group is committed to providing market users around the world with the broadest array of benchmark products, deep pools of liquidity, and the choice of trading on our electronic platform or trading floors," said CME CEO Craig Donohue. "Because energy products complement our diverse suite of product offerings, this acquisition creates immediate and long-term value for our combined company, our customers and our shareholders. We have a proven track record of completing large-scale integrations on schedule and according to plan, with a focus on ensuring a seamless experience for users of our markets. In addition to the expected operational cost efficiencies and revenue enhancements, the combined company will be able to further distribute Nymex benchmark products and expand OTC energy trading opportunities, helping to ensure that CME Group can sustain its strong, globally competitive position in the future."
Nymex CEO James E. Newsome said, "Both Nymex and CME Group have a proven track record of bringing new and innovative risk management products to the marketplace, and we are excited about the potential to create a viable, long-term trading environment for our combined products. In addition, the combination will create new development opportunities in new markets, for new products and for new customers. As a result of Nymex combining with CME Group, market participants will continue to rely on the price transparency and liquidity they have grown to expect from both exchanges while utilizing the CME Globex electronic trading platform. Nymex has always been proud of giving its customers the ability to choose where and how they trade by offering a diverse set of risk management tools in multiple venues. This transaction will expand those options tremendously."
Upon completion of the transaction, Duffy will remain executive chairman of CME Group and Donohue will remain CEO. The board of directors of CME Group will add three directors from Nymex.
The transaction is subject to approvals of regulators, shareholders of both companies and Nymex members, as well as the satisfaction of customary closing conditions. The boards of directors of CME Group and Nymex have each unanimously approved the transaction and each director on the boards of Nymex and CME Group has indicated an intent to vote in favor of the merger. Following the merger, trading privileges will be provided through a new trading permit program. Subject to necessary consents and approvals, the companies expect to close the merger in the fourth quarter of 2008.
Lehman Brothers, Goldman Sachs and William Blair are acting as financial advisors to CME Group, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as CME Group's legal advisor. JP Morgan and Merrill Lynch are acting as financial advisors to Nymex, Sandler O'Neill is acting as special financial adviser to Nymex in connection with Nymex Class A memberships, and Weil, Gotshal & Manges LLP is acting as Nymex's legal advisor.
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