exchanges, the Merc and the Board of Trade, went up for grabs Thursday after a
surprise $9.9 billion bid from an out-of-town rival who says the city would be
better off keeping its crosstown competition alive.
Atlanta-based IntercontinentalExchange Inc. on Thursday proposed combining
with the Chicago Board of Trade in an all-stock transaction said to provide a
10 percent premium over the offer on the table from the Chicago Mercantile
Exchange. Board of Trade shareholders would retain majority control, and the
merged company would remain headquartered in Chicago.
IntercontinentalExchange, or ICE, is a far smaller player in the futures
market and an upstart–it’s about 7 years old. With its last-minute offer,
made three weeks before the Board of Trade’s scheduled vote to approve the
Merc merger, ICE threatens to shake up one of Chicago’s most storied
industries just as it was reinventing itself.
The Merc and Board of Trade want to team up so they can better compete in
the globalized business of trading commodities and financial instruments
electronically. ICE sees the same opportunities but argues it would make a
better partner.
Ensuring that Chicago retains two competing exchanges “will go a long way”
to resolving antitrust concerns that regulators and industry officials have
raised about the Merc’s proposed acquisition of its longtime rival, said
Jeffrey Sprecher, chairman and chief executive of ICE. “From a regulatory
standpoint, this is a clean deal.”
It also would perpetuate a tradition of sometimes bitter divisions between
the Merc and the Board of Trade, two local institutions whose leaders have
feuded over matters big and small for generations. The bickering has subsided
in recent years, as both exchanges went public and their market value soared.
Even though the Merc would be taking over the Board of Trade, a tough pill for
some old-timers, analysts had expected shareholder approval by a wide margin
at a vote scheduled for April 4.
Though CBOT Holdings Inc. said it will proceed with the vote, its plan may
change if a bidding war erupts. Wall Street analysts say the Merc has the
financial muscle to top the ICE offer. And while the New York Stock Exchange
or others might jump in, “my gut feeling is there will not be another bidder,”
said Chris Allen, analyst at Banc of America Securities. “It’s going to be a
two-way battle.”
The Merc needs the Board of Trade more than ICE does, because an
acquisition is “the mainstay of at least their near-term strategy,” said
Richard Repetto, a principal at Sandler O’Neill & Partners. “I still think the
CME is the front-runner.”
Yet ICE laid out a compelling case for the acquisition, said Repetto, who
rated the likelihood of the upstart energy exchange completing the deal at 25
percent, up from a 5 percent long shot when he first heard of its bid Thursday
morning.
On Wall Street, investors took the offer seriously. Board of Trade shares
closed at $194.95, a gain of more than 17 percent, while stock of ICE and the
Merc declined. ICE shares closed at $128.10, down about 3 percent; Merc shares
fell 5.5 percent to close at $534.23.
For Board of Trade members who each have retained the 27,338 shares of
stock they received in the exchange’s public offering, Thursday’s rally
represented a $628,000 gain, said Chicago trader Jon Najarian, who through a
trust owns seats at the NYSE, CBOT and Chicago Board Options Exchange. “There
were high-fives all around the trading floor today.”
The momentum in favor of the Merc’s acquisition has given way to
uncertainty, added Chris Hehmeyer, chief executive of Chicago trading firm
Penson GHCO and a longtime Board of Trade member. “This changes everything. It
throws everything into question.”
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The Board of Trade said it would review the bid but declined to comment on
it, and executives from both exchanges mostly dodged questions here at the
futures industry’s annual conference in Florida.
At a Board of Trade press conference scheduled weeks ago for Thursday
morning, scrambled eggs and bacon were delivered to an empty table as exchange
brass, stunned by the unexpected bid, huddled in seclusion. One CBOT executive
heard about the proposal at 7 a.m. when ICE slipped a letter under his
hotel-room door.
A Merc executive speaking on a panel with ICE boss Sprecher deflected
questions about the deal, drawing a laugh from a crowd of industry insiders
when he said his exchange would respond by no longer serving ice in its drinks
at the events it sponsors here.
Under the proposed transaction, ICE would issue 1.42 of its shares for each
CBOT Class A common share, valued at $187.34 per Board of Trade share as of
Wednesday. That represented a 12.8 percent premium to CBOT’s closing share
price Wednesday. It also represented a 39.3 percent premium to its share price
on Oct. 16, the day before its merger agreement with the Merc, ICE said. The
bid topped a Merc offer valued at $8.96 billion, or $169.53 per share.
The steep valuations drew skepticism from some futures experts. “It’s a
little like we saw in 2000 with the Internet bubble,” said Patrice Blanc,
chairman and chief executive of Fimat International Bank, a big player in the
futures markets. “On the pure business side, is it making sense? I don’t
know.”
CBOT shareholders would own 51.5 percent of the combined company, and ICE
said it would commit to the same terms as the Merc regarding preservation of
Chicago’s traditional open outcry trading floors.
In a conference call with investors Thursday morning, Sprecher said his
plan would help preserve the Board of Trade’s “heritage” for Chicago. Because
the ICE deal does not involve a change in control, it also may improve the
chances of Board of Trade members retaining their rights to trade at the
Chicago Board Options Exchange, Sprecher added.
The CBOE has said those rights would be eliminated under the proposed Merc
deal.
Sprecher moved from the power plant business to trading in 2000 and built
ICE into a force quickly. It owns London’s International Petroleum Exchange
and operates an electronic energy marketplace, franchises that could help
boost the Board of Trade’s efforts to develop a contract on ethanol, the
corn-based fuel, said Board of Trade member Hehmeyer said.
Sprecher agreed that “energy and ags are a very good fit together. They
cater to the same customer.”
Yet others say the Merc and Board of Trade make a neater fit. “There is
more logic between the CBOT and CME,” said Blanc. Those similarities raised
antitrust concerns, given the 85 percent or higher U.S. market share that the
combined futures market would control. Cost savings would play a big role in
either deal.
ICE said that in addition to cost cuts and the revenue opportunities
available to the combined company, it would provide a comprehensive system for
matching and guaranteeing trades. The Board of Trade’s deal with the Merc for
those so-called clearing services is set to end in January 2009.
On Jan. 12, ICE acquired the New York Board of Trade, a small exchange
trading coffee, cocoa and other commodities, obtaining its clearing system in
the process. Sprecher said his board gave him the go-ahead to make a Board of
Trade bid because that transaction went so smoothly, and antitrust scrutiny of
the Merc’s bid was intensifying.
“We don’t have overlapping products. We have a relationship with the
Department of Justice,” Sprecher said. “We’re definitely the higher bidder.
Anyone can counter with a higher price for a deal they can’t get done.”
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