ICE Makes Bid to Acquire London-based IPE

IPE Holdings, operator of the London-based International Petroleum Exchange (IPE), kicked off last week by announcing that it has agreed to a recommended all-share takeover offer by U.S.-based IntercontinentalExchange (ICE), an electronic trading platform for energy and metals commodities.

The proposed acquisition by ICE has already been approved by IPE's board of directors. IPE now has 28 days to present the offer to its shareholders, which will have a minimum of 21 days to either approve or reject it, according to British law governing takeovers.

The proposed combination of the two exchanges "will establish one of the world's primary centers of liquidity for commodities trading, both in futures and over-the-counter products," said ICE CEO Jeffery Sprecher during a telephone press conference last Monday. It will bring together "in one fell swoop" the major players of the energy industry on a central platform, he noted, adding that ICE and IPE together have about 4,000 individual users.

An ICE-IPE marriage would provide a "couple of interesting strategic opportunities" for natural gas and power trading in the U.S. and globally, Sprecher said. For one, the acquisition of IPE will give ICE the chance to move existing European natural gas and power futures contracts --- which IPE recently launched on its own digital system --- onto a common electronic platform, he noted. In the U.S. gas and power markets, he said the deal will offer ICE the "opportunity to bring some better back-office settlement or credit management capabilities into that space."

IPE Chairman Sir Bob Reid conceded that the exchange's "greatest vulnerability" to date has been its inability to put in place an electronic platform. As a result, he said a "very large majority" of IPE's members have given the green light for the exchange to proceed with ICE merger proposal, which he called a "substantially attractive offer" and an "important milestone" for IPE.

"We, the [IPE], see this as a merger between two organizations where there is a lot of complementarity," according to a top IPE executive. "The [IPE] operates in a futures space," trading a Brent Futures Contract and an IPE Gas Oil Futures Contract, "which it has the dominant position in." ICE, on the other hand, "is operating in the OTC space, and by bringing the two together we believe we'll be able to generate a very powerful combined entity that isn't necessarily going to set out to compete with anyone [initially]. It's going to go out and generate business, with the opportunity to bring that business onto an additional platform or onto an exchange."

Under the deal reached, ICE has agreed to swap one share of ICE Inc. Class A Series 1 Common Stock and one share of ICE Inc. Class B Redeemable Common Stock for each IPE Holdings' share. The Class A share has been valued in the range of $1.75 to $6.11 and the Class B Redeemable share has been estimated in the range of $4.80 to $5.33, reflecting a total per-share valuation for IPE Holdings of $6.55 to $11.44 and an aggregate value for IPE Holdings' shares of $75 million to $131 million.

The terms of the agreement also would permit IPE Holdings' shareholders to cash in their Class B shares for a total of $67.5 million one year after IPE makes the transition to trading its major oil and natural gas futures contracts through an electronic trading platform. Based on these terms, the total value of the acquisition will range from $132 million to $198 million, according to IPE officials.

In the event all of IPE Holdings' shares are acquired by ICE, IPE Holdings shareholders will hold in aggregate 10% of the issued share capital of ICE Inc., which will succeed IntercontinentalExchange LLC as the parent entity of the ICE group, even before the two companies are combined.

The ICE-IPE merger talks have been under way for several months, according to the companies. "We have been discussing with the regulators over some months this proposed merger transaction, and the regulators are fully conversant with all the issues of the proposal," said IPE CEO Dr. Richard Ward. "They're particularly comforted by the governance arrangements that have been proposed under this transaction, whereby the IPE [will continue] as a recognized investment exchange in London, being regulated" by UK regulator, the Financial Services Authority (FSA). The FSA must approve the ICE planned takeover of IPE.

The boards of ICE and IPE Holdings have agreed to maintain the current structure and management of the IPE to ensure an orderly transition to electronic trading and coordination of the transition with regulator FSA. IPE's Reid and Ward will join the ICE board following the close of the transaction.

The Atlanta-based ICE, which was formed in May 2000, offers electronic OTC trading in 110 products in physical as well as cash settled derivatives based on oil, natural gas, power and metals. The electronic platform was created by a consortium of major financial institutions and energy companies, including BP Amoco, Royal Dutch Shell Group, Societie Generale Investment Banking, Totalfina Elf Group, Deutsche Bank, Goldman Sachs and Morgan Stanley Dean Witter. They were later joined by Aquila Energy, American Electric Power, Duke Energy, El Paso Energy, Reliant Energy and Mirant (formerly Southern Energy). The company has offices in Houston, New York City and London, and just recently opened one in Chicago.

ICE reported that about 300 traders have traded physical and financial natural gas on the exchange since the beginning of the year, transacting more than 1,500 Tcf as of early April. In fact, it said it set a record for gas volumes traded during the week ended April 6, selling more than 370 Bcf/d.

IPE is considered a leading energy futures and options exchange in London.

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