Chicago Mercantile Exchange Holdings Inc. (CME) and CBOT Holdings, parent of the Chicago Board of Trade (CBOT), jointly announced Friday morning that they have revised the terms of their definitive merger agreement, potentially leaving the rival bid for CBOT from Atlanta-based IntercontinentalExchange (ICE) in jeopardy.
CBOT Holding's board of directors and its special transaction committee have unanimously reaffirmed their recommendation that CBOT Holdings shareholders vote in favor of the merger agreement with CME and also concluded that the unsolicited proposal submitted by ICE was "not superior" to the revised CME transaction.
CME first publicly approached CBOT with its $8 billion offer in October (see Daily GPI, Oct. 18, 2006). In March, ICE proposed a $9.9 billion stock-for-stock transaction for CBOT (see Daily GPI, March 16; March 23). CME's revised bid Friday was valued at $9.2 billion.
Commenting on the most recent development, ICE said it believes its offer is still the best one on the table. "We are reviewing this morning's announcement and evaluating our options, the global electronic exchange said. "ICE continues to believe the combination of CBOT and ICE offers CBOT shareholders and members greater immediate and long-term value as well as better growth prospects than its acquisition by CME."
Under the terms of the revised agreement, CBOT Holdings shareholders will receive 0.35 shares of CME Class A common stock for each share of CBOT Class A common stock, an increase of 16% from the original terms of the merger agreement. If the transaction is completed, current CBOT Holdings shareholders will own approximately 34.6% of the outstanding shares of the combined company, up from approximately 31.2% in the original agreement. CBOT will also receive additional representation on the combined company's board of directors, with 10 of the 30 seats filled by current CBOT directors.
CME also announced that it will make a cash tender offer for up to $3.5 billion in common stock of the combined company, or approximately 12% of the combined company's outstanding shares, at a fixed price of $560/share, to commence shortly after the closing of the merger. The tender offer will be open to CBOT Holdings shareholders that receive CME stock in connection with the merger, as well as existing CME shareholders. The tender offer will be in lieu of the cash election feature that was part of the original merger agreement. CME has received financing commitments for $2.5 billion from Lehman Brothers, which, along with available cash balances, will fund the tender offer.
"The board and management of CME and CBOT recognize the tremendous potential for value creation in a merger of our two companies," said Terry Duffy, CME's executive chairman. "We believe there is strong support for the combination from shareholders and members of both companies, and these revised terms and the cash tender offer makes our already compelling transaction even more attractive. Since we announced the original agreement last October, both CME and CBOT have delivered strong financial performance and volume growth, underscoring the strategic rationale for bringing these two great Chicago institutions together. We look forward to completing this merger and realizing the full benefits for customers and shareholders of both companies."
If completed, the merger is expected to be accretive to earnings of the combined company on a cash basis within 12 months and on a GAAP basis within 12 to 18 months following the close. The share repurchase is expected to provide additional earnings accretion.
"After a thorough review of ICE and careful consideration of its proposal and the revised proposal from CME, the boards of CBOT Holdings and the CBOT concluded that the revised merger agreement with CME offered greater overall benefits for our shareholders and members," said Charlie Carey, CBOT chairman. "Our boards and advisors carefully reviewed both the short-term and long-term value of both transactions. A combination with the CME will create the most extensive and diverse global derivatives exchange, transforming global derivatives markets and creating efficiencies for customers and members while delivering significant benefits to shareholders. In addition, given our common clearing arrangement with CME and the CME Globex electronic platform, we believe a combination with CME presents significantly less integration risk than a combination with ICE. We look forward to the July 9 vote and to completing the transaction as soon as possible after the vote."
Both parties confirmed that they are in substantial compliance with the Hart-Scott-Rodino Act and currently expect the Department of Justice to conclude its review of the merger prior to the time of the shareholder votes.
"Through our CME/CBOT merger, we are poised to create a premier global exchange, with the capabilities and expertise to continue to develop innovative products, compete successfully in the international marketplace and participate in the growing OTC [over the counter] markets," said CME CEO Craig Donohue. "The more we explore the opportunities this merger creates, the more we see the tremendous potential for product innovation, technology enhancements, trading opportunities and increased efficiencies unique to this merger. The significant benefits and enhanced synergies we expect to deliver as a result of this merger validate our enhanced offer. Based on revised estimates, the companies now expect pre-tax cost savings of at least $150 million to be achieved within the first two years following close, up from the $125 million originally identified. CME also has identified at least $75 million in revenue synergies on a net basis as a result of the combination."
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