Just days ahead of the shareholder vote on the combination of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), the companies said Friday that they have revised the terms of their definitive merger agreement to increase the exchange ratio from 0.350 to 0.375 shares of CME Holdings common stock for each share of CBOT Holdings common stock.

The revised agreement has been approved by the boards of directors of both companies and awaits a shareholder vote on Monday, which could leave a competing CBOT merger bid by IntercontinentalExchange (ICE) out in the cold. In addition, CME and CBOT said Friday that Caledonia Investments PYT. Ltd., CBOT’s largest shareholder, will endorse the revised merger agreement and fully support the combination of CME and CBOT.

Responding to ICE’s most recent merger proposal, CBOT Holdings Inc., parent company of CBOT, said its board of directors and special committees have met and reviewed the revised proposal and have again concluded that the ICE proposal “is not superior” to the amended merger agreement with the CME.

“Nothing important has changed from the offer ICE submitted on June 12,” said CBOT Chairman Charles P. Carey. “ICE has not resolved the significant risks identified during the comprehensive due diligence we conducted of ICE and its trading and clearing systems.”

Over the past two months, the back and forth battle for CBOT’s hand has intensified as CME and ICE have taken turns touting their proposals while attempting to discredit the opposing offer (see Daily GPI, July 5; July 2). While CME’s offer has the approval of CBOT’s board, ICE continues to attempt to convince CBOT’s membership and shareholders that its offer is “superior” on all fronts.

CBOT CEO Bernard W. Dan said, “ICE has not adequately addressed important strategic and operational concerns, such as integration and execution risk. In our view, ICE’s proposal that we migrate our clearing operations twice, first to AEMS [Atos Euronext Market Solutions] and then to ICE, compounds the risk and would create even greater disruption for our market users.”

Commenting on ICE’s most recent merger proposal, CME said that the Atlanta-based exchange has failed to address the “flaws” in its offer.

“ICE continues to try to play the role of a spoiler in the CME-CBOT merger agreement and has offered nothing new to its proposal,” CME said in a statement. “Having been rejected by CBOT’s board not once but twice, ICE has yet to address the fundamental strategic and operational flaws in its proposed transaction. ICE has also put forward a speculative ERP [exercise right privileges] offer that significantly undervalues those rights and which has not even been approved by CBOE [Chicago Board Options Exchange] members, let alone the Delaware court or CBOT members. As a result, the only option ICE has is to try to disrupt the CME and CBOT merger. The fact remains that a combined CME and CBOT offers greater long-term value for CBOT shareholders with lower risk, while offering customers of both exchanges significant benefits that ICE cannot match.”

If the CME/CBOT transaction is completed, current CBOT shareholders will own approximately 36% of the outstanding shares of the combined company, up from approximately 35% in the existing agreement. All other terms of the existing merger agreement between the two companies remain the same, including the pre-close special dividend by CBOT Holdings to its shareholders of $9.14 per share, the post-close tender offer for up to $3.5 billion of shares of the combined company (or about 11.4%) at a fixed price of $560 per share and the terms of CME’s purchase offer and minimum guarantee regarding the CBOE exercise rights.

CME also said the enhanced merger consideration announced Friday constitutes a “best and final” offer.

“This enhancement to the terms of our merger agreement reflects our commitment to joining forces with the CBOT and our conviction that no combination can match the benefits we will create for all shareholders, members and customers,” said CME Chairman Terry Duffy. “The merger of CME and CBOT will create significant cost savings, preserve important core member trading rights, and generate exciting new growth opportunities. As the largest and most diverse exchange, the combined company will be a strong global competitor, and we look forward to aggressively pursuing our growth strategy.”

“The merger of CME and CBOT is more compelling than ever,” said Carey. “The combination of CME and CBOT will create a global derivatives exchange that is unparalleled in scope, size and functionality, while the increase in the exchange ratio will provide our shareholders with significantly greater overall value. A combination of CME and CBOT will allow us to better compete in a rapidly changing global environment and will provide significant benefits to our shareholders, members and customers. I urge our shareholders and members to vote for the merger at our special meeting on July 9.”

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