Merc Buys CBOT To Create World’s Biggest Exchange
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The two largest American futures exchanges announced plans Tuesday to consolidate and create the world’s largest derivatives market, with the Chicago Mercantile Exchange set to buy the Chicago Board of Trade, its cross-town rival, for about $8 billion in stock and cash.
Through the deal, seen closing by mid-2007 pending regulatory approval, CME parent Chicago Mercantile Exchange Holdings Inc. will acquire CBOT Holdings Inc. by swapping 0.3006 shares of Chicago Mercantile Class A common stock for each CBOT Class A common share. CBOT shareholders can also elect to receive up to $3 billion in cash through the deal.
Shares of both exchanges jumped to all-time highs on the news Tuesday. CBOT Holdings, which also announced a jump in third-quarter earnings Tuesday, recently traded at $151.67, up $17.16,or 12.8%.Shares of CME recently traded at $515.24, up $11.99, or 2.4%.
The transaction comes after a year of negotiations and represents perhaps the most dramatic move yet in a wave of exchange consolidation, creating a combined company valued at $25 billion based on Monday’s closing price. Both exchanges, long-time Chicago institutions built on a foundation of agricultural futures, have grown their business significantly in recent years behind a surge in the trade of futures and options tied to interest rates.
The combined company will have average daily volume approaching 9 million contracts and will become the world’s largest derivatives market by volume, according to the exchanges. Combined, 1.44 billion contracts traded last year at both exchanges, ranking ahead of competitors like the Korean Exchange, Eurex and Euronext.liffe.
“There are a lot of reasons to like this deal, including greater scale, further diversification of the product set, and potentially conservative cost savings assumptions,” Banc of America analyst Christopher Allen said in a note.
Challenges include the “law of large numbers” and a CME shift to a focus on execution rather than growth, but “we have confidence that CME’s management team will be able to successfully execute the transaction and the combined company will be a powerful global competitor,” Mr. Allen said.
The companies expect the deal to add to earnings in 12 to 18 months after the close. The companies also see pretax cost savings from the deal of more than $125 million starting in the second full year following closing.
Upon completion of the deal, Chicago Merc stockholders will own about 69% of the combined company with CBOT’s shareholders owning the remaining 31% stake.CME, which finished the second quarter with $1.1 billion in working capital, plans to issue up to $2 billion in debt to help finance the deal.
John Tekeser, money manager and senior vice president for St. Louisbased Forsyth Securities with clients who own shares of both exchanges, said the deal “just simply makes sense,” and that he long wondered why they hadn’t merged. Mr. Tekeser said his clients have seen the value of their holdings appreciate considerably since the exchanges went public in recent years. The CME went public at $35 in December 2002, while CBOT went public at $54 a share in October 2005.
The combined company will be called CME Group Inc., with its headquarters in Chicago. It will have dominant positions in several asset classes, including interest-rate products, equity indexes, foreign exchange contracts and several commodities products.