IntercontinentalExchange Inc. (ICE) Thursday made a rival bid for Chicago Board of Trade parent CBOT Holdings Inc. in a $9.9 billion stock-for-stock transaction that would create "the world's most comprehensive" derivatives exchange. The proposal is a direct challenge to a pending $8 billion bid for CBOT by the Chicago Mercantile Exchange (CME) (see Daily GPI, Oct. 18, 2006).

The combination of the Atlanta-based exchange and the parent of the Chicago Board of Trade would result in a global futures and over-the-counter derivatives marketplace headquartered in Chicago. The combined company would have a presence in the major derivatives categories, including agricultural and energy products, interest rates and metals and would be supported by integrated clearing capabilities and state-of-the-art trading technology.

If a deal is consummated, it would give ICE access to CBOT's precious metals and agricultural futures contracts, including ethanol futures. It also would be a boost to ICE in its ongoing rivalry with the New York Mercantile Exchange (Nymex), the world's largest energy futures exchange.

Press reports Thursday quoted analysts as downplaying any threat to Nymex's energy hegemony from the deal. Nymex has seen energy volumes skyrocket this year, thanks in part to its connection with CME, which gives it access to the Globex electronic trading platform (see Daily GPI, March 6). Electronic trading now accounts for about two-thirds of overall Nymex volumes. ICE also is seeing record volumes on its ICE Futures exchange (see Daily GPI, March 5).

A Northeast broker told NGI that the play for CBOT is a smart one by ICE given the tie-up that already exists between Nymex and CME. "Nymex at this point is somewhat in bed with CME on the whole Globex partnership, so I would not be surprised if somewhere down tech road there is a merger or takeover between Nymex and CME," he said. "With Nymex successfully going public (see Daily GPI, Nov. 15, 2006), it would appear that they are positioning themselves for something like that. We may get into the fight of CME/Nymex versus ICE/CBOT."

ICE told the CBOT board of directors that the corporate headquarters of the combined entity would be CBOT's landmark building in Chicago. In addition ICE said it intends to retain the Chicago Board of Trade name and leverage it to create a new brand identity for regulated futures exchanges in New York, London and Dublin.

"We are committed to building on the great heritage of the CBOT," ICE CEO Jeffrey C. Sprecher said on an analyst conference call Thursday. He said that acquisition of CBOT by CME would be the end of the CBOT story; however, a deal with ICE would allow the 158-year CBOT legacy to continue.

That soft-touch approach could be appealing, the Northeast broker told NGI.

"ICE has already made its first shot at becoming a major player in the U.S. exchanges by purchasing the New York Board of Trade, but I think the ICE move at CBOT to come in as more of a partner as opposed to a takeover could really be more attractive to some of the CBOT membership who might be against the CME takeover," he said. "It certainly gives the CBOT an alternative that would allow them to remain somewhat autonomous. I think it is a very smart move on the part of ICE."

Sprecher said that at the time CME and CBOT struck their deal, ICE was not prepared to enter the fray. "We are now a different company than we were when the [Chicago] Board of Trade chose its different partner," he said, adding that a CBOT transaction with ICE would potentially be smoother given the ongoing Department of Justice review of the CME-CBOT transaction.

"While the CME transaction represents a sale of the company, our proposal is truly a merger that is intended to preserve the culture and heritage of the Chicago Board of Trade," ICE wrote CBOT's board. "We believe our proposal is superior, from both a financial and strategic perspective, to the CME proposal and is capable of consummation without material regulatory impediments."

A Midwest broker told NGI he was unimpressed by the ICE-CBOT deal. "I don't know what the advantage here is with ownership over partnership," he said. "While the deal will definitely make ICE bigger, will the exchange be able to offer more products? I don't think so. ICE is already an electronic trading platform, so what does it need another one for?"

Sprecher is so confident in ICE's bid for CBOT that he told analysts Thursday he is closing on a new home in Chicago April 2 and ICE is establishing a Chicago-based data center that will be large enough to give the company room to grow.

Under terms of the proposed deal:

In its letter to the CBOT board, ICE noted that the pending deal with CME includes a cash election of up to $3 billion for CBOT shareholders in lieu of shares. "Should you feel that a cash alternative is important to your shareholders, we would be pleased to explore this option and have access to significant financing sources should this be required," ICE wrote the CBOT board. Sprecher said during the conference call that he didn't think the cash component was that important to CBOT board members.

Unlike a combination of CME and CBOT, ICE believes no significant antitrust or other regulatory risks exist in a combination of ICE and CBOT and a transaction could be completed quickly, thereby delivering both near-term and long-term benefits to all stakeholders of both ICE and CBOT.

ICE estimates transaction benefits of at least $240 million annually upon the full integration of ICE and CBOT. In addition to identified expense rationalization and the revenue growth opportunities available to the combined company, clearing benefits also exist as ICE could provide a fully operational clearing solution for CBOT's products upon termination of CBOT's existing clearing agreement with CME in January 2009. ICE said it believes the combination would be accretive to cash earnings per share within 18 months of closing.

"This is an extremely compelling combination for Chicago Board of Trade and IntercontinentalExchange shareholders, trading members, customers, clearing firms, employees, the derivatives industry and the City of Chicago," said Sprecher. "The CBOT board of directors has the opportunity to achieve a transaction that offers a considerable premium to the pending CME transaction and, at the same time, secures the CBOT's position as a leading independent global derivatives complex based in Chicago. The combined company would be extremely well positioned in nearly every high-growth derivatives segment, and would have the platform to capitalize on the many emerging growth opportunities in the dynamic derivatives landscape on a global scale. The transaction we are proposing is clearly superior to a combination with the CME for CBOT's shareholders and other stakeholders."

Since Jan. 1, 2006, the value of ICE shares has increased 348% compared with growth in CBOT shares of 80.5% and in CME shares of 55.5% over the same period, ICE said. ICE has completed the acquisitions of International Petroleum Exchange (see Daily GPI, June 19, 2001) and the New York Board of Trade (see Daily GPI, Jan. 16).

"A merger of our two companies is a unique opportunity to create a leading derivatives trading platform across a broad spectrum of futures and options products, incorporating our complementary positions in agricultural commodities and leading capabilities in interest rates, energy, gold and silver, as well as other financial contracts such as equity indices and foreign exchange pairs," ICE wrote the CBOT board. "The combined entity would operate regulated exchanges in the U.S., Europe, and Asia and also support the global over-the-counter (OTC) derivatives market."

Morgan Stanley is serving as financial advisor to ICE and Sullivan and Cromwell LLP is serving as legal advisor to ICE.

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