Five months after sale talks stalled (see NGI, Sept. 3, 2007), New York Mercantile Exchange (Nymex) parent Nymex Holdings reported early last week that it is in negotiations to be acquired by the CME Group, owner of the Chicago Mercantile Exchange, in what would be an $11 billion cash and stock deal. Also last week, Nymex reported record 4Q2007 and full-year 2007 revenues.

Responding to market rumors, CME and Nymex confirmed that they are engaged in preliminary discussions and have agreed to a 30-day exclusive negotiating period. Under the terms being discussed, shareholders of Nymex would receive $36 in cash and 0.1323 of a share of CME’s common stock (the exchange ratio) in exchange for each Nymex share. CME said it expects to maintain trading floors in the New York City metropolitan area.

The potential transaction also contemplates that Nymex will repurchase the 816 New York Mercantile Exchange memberships upon closing of the potential acquisition for an aggregate purchase price not to exceed $500 million.

The combination of Nymex and CME would bring together two titans in the exchange arena. CME offers a wide range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, agricultural commodities and alternative investment products such as weather and real estate. Nymex’s main strength is the trading of energy and metals contracts. In June 2006 Nymex partnered with CME to list some contracts on CME’s electronic exchange Globex (see NGI, June 12, 2006).

Over the past few years exchange mergers have been moving at a fast and furious pace as companies attempt to create synergies, expand product offerings and keep up with evolving technology. IntercontinentalExchange consummated its $1 billion-plus merger with the New York Board of Trade in early 2007 (see NGI, Jan. 16, 2007), while the New York Stock Exchange got together with Euronext last April. CME completed its bid for the Chicago Board of Trade last summer (see NGI, July 11, 2007) and earlier this month the New York Stock Exchange bought the American Stock Exchange.

Nymex and CME warned that discussions are in early stages and that the terms of any potential transaction may be materially different from what is being discussed. The transaction remains subject to negotiation of other terms, completion of due diligence, negotiation of terms of a definitive agreement and approvals of the boards of directors of both companies.

“There can be no assurances that any agreement will be reached or that a transaction will be completed on the terms set forth above or others,” the companies said. “We will have no further comment until an agreement is reached or the discussions are terminated.”

During the company’s earnings call later in the week, Nymex executives once again refused further comment.

Nymex reported record total operating revenues for full-year 2007 of $673.6 million, a 35% increase from $497.2 million for 2006. Net income for the year rose 45% to $224 million versus $154.8 million in 2006. Excluding a one-time charge related to Optionable Inc. in the second quarter of 2007, net income increased 54% to $238.8 million for the full year.

Total operating revenues for 4Q2007 rose 38% to a record $172.6 million compared to $124.8 million for 4Q2006. Net income for 4Q2007 increased 50% to a record $63.5 million compared to $42.3 million for 4Q2006. Diluted earnings per share (EPS) for 4Q2007 were 67 cents, based on 94.9 million shares outstanding, compared to 48 cents, for 4Q2006 based on 87.6 million shares outstanding.

Diluted EPS for full-year 2007 was $2.36 versus $1.90 in 2006, based on 94.9 million and 81.5 million shares outstanding, respectively. Excluding the one-time charge, diluted EPS for the full year was $2.52.

Nymex said its expansion into international markets helped boost the company’s 4Q and full-year results. “We delivered a strong year of operating performance and profitability as we continued to execute on our strategic goals,” said Nymex Chairman Richard Schaeffer. “Throughout the year we delivered dramatic volume growth through the successful adoption of electronic trading of our markets while also expanding into new markets and establishing important alliances, such as the launch of our leading Dubai Mercantile Exchange (DME) joint venture in June. Our recent purchase of a 15% stake in Imarex ASA, a leading Norwegian freight derivatives exchange, represents an important expansion into the substantial European derivatives market.

“In addition, we are proud of our leadership in creating The Green Exchange venture, which we expect will become the primary exchange for environmental markets contracts. We remain focused on expanding our distribution internationally, developing innovative product offerings and new ventures, and continuing to deliver profitable growth to shareholders.”

During the quarter and the year, Nymex also continued to watch the migration from floor trading to electronic trading. Average daily volume for 2007 was 1.485 million contracts, a 25% increase over 2006. Nymex electronic trading volume on CME Globex averaged 649,552 contracts per day, which represented a 234% increase over 2006 electronic trading volume. Nymex floor-traded energy futures and options averaged 260,160 contracts a day in 2007.

During 4Q2007, average daily volume was 1.539 million contracts, a 28% increase over the fourth quarter 2006. Nymex electronic trading volume on CME Globex averaged 703,673 contracts per day and represented a 91% increase over fourth quarter 2006 electronic trading volume. Nymex floor-traded energy futures and options averaged 228,678 contracts a day for 4Q2007 versus 362,259 contracts per day for the same period of 2006.

“We improved profitability in 2007 through our expense reduction program and achieved a record 71% pre-tax margin for the fourth quarter and 65% pre-tax margin for the year,” said Nymex CEO James E. Newsome. “Nymex continued to set multiple single-day electronic trading volume records on the CME Globex electronic trading platform, as well as numerous volume and open interest records in our benchmark contracts. Our product innovation continues to lead the industry with the listing of electronic options on futures, carbon emissions, uranium, catastrophe risk futures, and the growing Oman Sour Crude contract, which now dominates Middle Eastern crude oil volume and open interest.”

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