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ICE Offers $10 Billion to Thwart CME, CBOT Deal

The Chicago Board of Trade (CBOT), which agreed last October to merge with the Chicago Mercantile Exchange, has received a competing bid from all-electronic rival InterContinentalExchange (ICE).

Directors from CBOT are understood to be meeting on Tuesday March 20 to evaluate the counterbid.

ICE, an energy and commodities marketplace, said last Thursday March 15 that it had made an unsolicited offer to combine the two companies in a stock-for-stock transaction, which amounts to just under $10 billion based on its $187.34-a-share offer for CBOT’s 52.84 million outstanding shares.

The offer is worth $1 billion more to CBOT shareholders and comes less than three weeks before CBOT shareholders are scheduled to vote on the CME deal on April 4.

Jeffrey Sprecher, chairman and chief executive of ICE, last week played on fears that regulators could block or dilute the merits of the all-Chicago merger because of its near monopoly on clearing exchange-traded futures, a claim which CME management has rejected.

Sprecher said he was aware the US Department of Justice was looking carefully at the CME/CBOT deal for antitrust issues and that shareholders were being asked to vote without having knowledge of the outcome of the regulatory review.

In a conference call he said he was confident there were no competition issues in the proposed ICE deal, which he says would close in the third quarter.

The ICE offer could have profound implications for both Chicago exchanges if the CME doesn’t come back with a higher bid. CME has so far declined to comment on whether it will raise the stakes with more cash.

Under the proposal, ICE said it would commit to the same terms as the CME offer regarding preservation of Chicago’s traditional open outcry trading floors, and that CBOT’s shareholders would own 51.5% of the combined company – rather than 31% in a potential CME deal – in a transaction “that would create the world’s most comprehensive derivatives exchange”.

ICE said also that it would move its headquarters from Atlanta to Chicago and that CBOT would retain its name.

The combination with CBOT would result in a futures and over-the-counter derivatives marketplace with a strong franchise in the agricultural, energy, interest rate and metals markets and would go head to head with the potentially jilted CME.

“This is an extremely compelling combination for Chicago Board of Trade and IntercontinentalExchange shareholders, trading members, customers, clearing firms, employees, the derivatives industry and the City of Chicago,” said Sprecher.

“The CBOT board of directors has the opportunity to achieve a transaction that offers a considerable premium to the pending CME transaction and, at the same time, secures CBOT’s position as a leading independent global derivatives complex based in Chicago…the transaction we are proposing is clearly superior to a combination with CME for CBOT’s shareholders and other stakeholders.”

ICE is moving quickly to strengthen its own role in the industry following its purchase of the New York Board of Trade for $1billion last September. The move could effectively double the size of ICE, which also expanded into the energy sector by acquiring the London-based International Petroleum Exchange in June 2001.

While the potential management structure of an ICE-CBOT combination has yet to be revealed, only one senior CBOT executive was due to remain with the enlarged CME Group (Squawkbox, January, 29).

The offer comes as a surprise to industry observers, with analysts saying CME has the financial muscle to top the ICE offer. Octavio Marenzi, CEO of research company Celent says that although ICE’s move was “a shocker”, CME is in a very strong financial position. “They are very well situated and there is no financial pressure that would push them towards other acquisitions. The only pressure would be psychological – but not financial,” he tells Squawkbox.

Marenzi also dismisses the possibility of other exchanges making bids on CBOT: “I don’t think that other exchanges would want to get involved in a bidding war. And if there were other interested parties they would have already placed a bid for CBOT.”

In a statement issued on Thursday March 15, CME said: “We are confident that the CME/CBOT merger will create a strong combination and provide significant and unique benefits for shareholders and customers of both companies. We are working toward the successful completion of our transaction.”

Just two days before ICE’s announcement, CME and CBOT made public their plans for shifting electronically traded CBoT products onto the CME Globex platform in a phased migration, beginning in the first quarter of 2008, when CME and CBOT’s open outcry markets would be migrated onto a single trading floor facility located at CBOT.

“Both organisations are working very hard to ensure that CME Group will be in a position to deliver at least $125 million in annual expense synergies as
soon as possible after the close of our historic merger,” said CME CEO Craig Donohue two days before ICE’s unexpected announcement. “Our valued customers, who will also realise annual savings of approximately $70 million, will benefit greatly from our accelerated integration timeframe.”

Meanwhile CBOT Holdings, the holding company of the CBOT, issued a statement saying that its board of directors, its special transaction committee and CBOT’s board of directors will review the ICE proposal “as soon as practicable in a manner consistent with their duties and the merger agreement with Chicago Mercantile Exchange Holdings.”


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