NGI The Weekly Gas Market Report
The Chicago Mercantile Exchange (CME) and the IntercontinentalExchange (ICE) traded so many barbs last week in their dueling pursuit of the Chicago Board of Trade (CBOT) that they could make markets in boasts, brickbats and business bromides.
The storied CME and the brash ICE are fighting to see which takes the next step in the consolidation march of the world’s commodities and derivatives exchanges. ICE recently made a rival bid for CBOT Holdings Inc. in a $9.9 billion stock-for-stock deal (see NGI, March 19) in a direct challenge to a pending $8 billion bid for CBOT by CME (see NGI, Oct. 23, 2006).
Last Thursday it was CME’s turn to go on the offensive, first in a morning conference call to tout its proposal to analysts, then in an afternoon meeting with CBOT members and shareholders. Following the meeting, CME executives had a brief press conference.
During the morning conference call the CME executive bench rolled through a 38-slide presentation. CME, which first publicly approached CBOT with its $8 billion offer in October (see NGI, Oct. 23, 2006), claims that its deal would create $70 million in operational and cost efficiencies for customers and more than $125 million in estimated annual cost savings. CME says its deal would be accretive to earnings 12-18 months after closing.
As for ICE’s proposal, CME said it:
There was plenty else said to get ears burning over at ICE, and the Internet-age exchange that made its name in energy was quick to respond.
“CME’s increasing attempts to discredit ICE don’t change the fact that our offer is clearly superior — the ICE offer provides much higher current value, is pro-competitive, and will create a stronger business that we believe is better positioned for future growth,” ICE said in a statement Thursday.
The Atlanta-based electronic exchange said that based on Wednesday’s closing prices, the ICE deal is worth $184.25 per CBOT share, 13% more ($1.2 billion) than CME’s proposal, which ICE said is valued at $162.47/share.
During its morning call with analysts, CME said the all-stock ICE deal would leave CBOT shareholders holding shares in “a very small company.” CME CEO Craig Donohue described ICE’s pursuit of CBOT as “a minnow trying to swallow the whale…”
And “the minnow” responded in its press release: “ICE has smoothly integrated two exchanges from prior acquisitions, IPE [International Petroleum Exchange] (see NGI, May 7, 2001) and NYBOT [New York Board of Trade] (see Daily GPI, Jan. 15), which has resulted in significant benefits for customers and increased value for shareholders (Including the former owners of these exchanges). In contrast, CME has no exchange integration experience.”
In talking down the CME proposal, ICE has made much of the possibility that the U.S. Department of Justice (DOJ) could substantially modify the deal or even quash it.
“It’s really hard for me to see how that merger could be approved. It would be surprising if the transaction was approved without some restructuring,” said Douglas Rosenthal, a former chief of the foreign commerce section of the DOJ, as quoted by Bloomberg News Service Thursday.
Analysts quizzing CME executives Thursday were quite curious about the implications for DOJ modification of the deal following antitrust review. Donohue said that neither CME nor CBOT would be required to go through with a deal if the DOJ instituted “unreasonable” restrictions. He said that shareholder votes on the deal and antitrust approval are separate items.
During the press briefing, Donohue emphasized that CBOT’s board does not have the ability to vote on the ICE proposal as CME has a pending definitive merger agreement. Right now, he said, “the Board of Trade is evaluating an inferior proposal [ICE’s].”
Also last week, ICE delivered its formal proposal to CBOT, and the CBOT Holdings board gave the go-ahead for merger talks with ICE. However, ICE also scrapped plans for an informational meeting with CBOT it had scheduled for Wednesday. CBOT postponed its vote on the CME proposal to give it time to consider the proposal from ICE.
Based on Futures Industry Association data, an ICE/CBOT combination would have pro forma 2006 U.S. market share of 33.4% vs. 87.3% for a CME/CBOT combination (including Nymex contracts traded on Globex). A CME/CBOT combination would have 100% market share in interest rates; 99.7% in equity indices; and 96.8% in foreign currencies, ICE said.
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