ICE proposes $10 billion merger with CBOT

The IntercontinentalExchange (ICE) has made a proposal to the Chicago Board of Trade to combine the two companies in a stock-for-stock transaction that would create the world’s most comprehensive derivatives exchange, ICE announced today.

The new company would be headquartered in Chicago. “The combined company would have a leading presence in the major derivatives categories, including agricultural and energy products, interest rates and metals, and would be supported by integrated clearing capabilities and state-of-the-art trading technology,” ICE said in a statement.

Cbot is currently in merger talks with the Chicago Mercantile Exchange. In a conference call, ICE chairman Jeffrey Sprecher claimed that the CME had undervalued the Cbot while emphasizing the fact that the proposed CME/Cbot merger, due to be presented to members on April 4, has yet to win regulatory approval.

Sprecher said that the ICE proposal would create more competition in the exchanges space, generate substantial savings in clearing while protecting the Chicago board’s 150 year heritage.

In particular, he pledged that ICE would invest in Cbot’s metals business which could otherwise be potentially threatened by the non-compete clause that exists between the New York Mercantile Exchange (Nymex) and CME, whose Globex system carries products listed on Nymex’s Comex subsidiary. This means Cbot’s gold and silver products potentially being unable to compete with gold, silver, copper, palladium, aluminium and platinum carried by Comex.

“We have the superior proposal and the best solution for the shareholders and we are committed to building the metals complex,” said Sprecher. “We believe we’re in the best position with the regulators because we are going to create competition across multiple asset classes and create two strong derivatives exchanges in North America that will be very competitive with each other, located a few thousand yards away from one another.”

Under the terms of the existing proposal, Cbot would pay a break up fee to the CME of around $240 million, which Sprecher said was factored in to the deal in excess of the $1billion more that ICE has offered above the current merger price.

He also noted that the Cbot management was initially receptive to the ICE offer, despite its surprising nature and possibly inconvenient timing, given that executives from the Chicago exchanges are currently out of the office attending a conference in Boca Raton, Florida.

“As you can imagine this is a bit of a surprise for them in terms of the timing and the proposal,” Sprecher said. “They are very cordial, they are very aware of their responsibilities to their members and the responsibilities they have under their current merger. I think it went quite well.”

When asked if such friendliness might dissolve into a hostile takeover bid in the event of an initial refusal, Sprecher would not comment. “There’s no reason for this to get hostile given the superior proposal and the backdrop that’s going on right now in the Department of Justice review of the other proposal,” he said.

If Ice’s audacious bid were to succeed, the exchange would find itself with two trading floors: the Nybot’s floor in New York and that of the Cbot. Sprecher maintained that both would form a necessary part of the new organization, and that Ice would protect the previous commitment made by the CME to keep Cbot’s floors open, despite it being an electronic platform.

“A lot of business is coming from those floors which hasn’t been able to be made electronic, such as options and complex derivatives, so we don’t have in our synergies some master plan on closing floors. That’s not where the real value is. The obvious value is in the clearing, the technology, protecting the metals complex as a future growth driver, rationalizing the other parts of the business.”

Sprecher also said that a clearing house would probably be domiciled in Chicago, before underlying his commitment to the city by announcing that he had recently purchased a new home in Chicago in a deal that will close April 2.

In response, the CME released a statement today reiterating their intention to proceed with the deal. A spokesperson for Cbot was not immediately available for comment.

Terms of the proposed transaction, as set out in the statement are as follows:

• ICE would issue 1.42 ICE shares for each CBOT Class A common share, valued at $187.34 per CBOT share based on yesterday’s closing price of ICE shares. This represents a 12.8% premium to CBOT’s current share price, and a 39.3% premium to its share price on October 16, 2006, the day before announcement of its merger agreement with the Chicago Mercantile Exchange. The $187.34 per share value also represents a premium of 10.5% to the current value of the pending CME/CBOT transaction to CBOT shareholders.

• CBOT shareholders would own approximately 51.5% of the combined company and, in addition to receiving a premium, would participate in the significant strategic and financial benefits of the combination.

• ICE is committed to preserving the heritage of CBOT, bringing its brand and expertise forward on a global scale as the derivatives marketplace expands.

• ICE will commit to the same terms as the CME offer regarding CBOT’s open auction markets and will protect and grow the CBOT metals complex.

• ICE proposes to enter into a transaction on terms similar to those in the current CBOT merger agreement with CME. Flexibility in the potential legal structure of the transaction exists to provide CBOT members who hold Chicago Board Options Exchange exercise rights a preferred structure to preserve these rights.

• Unlike a combination of CME and CBOT, ICE believes no significant antitrust or other regulatory risks exist in a combination of ICE and CBOT and a transaction could be completed quickly, thereby delivering both near-term and long-term benefits to all stakeholders of both ICE and CBOT.

Based on publicly available information, ICE estimates transaction benefits of at least $240 million annually upon the full integration of ICE and CBOT.

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