CBOT bids go to the wire

Futures, Jul 2007 by Collins, Daniel P, McMahon, Chris

DOJ OKAYS CHICAGO TIE UP

In the run up to the July 9 shareholder vote on the potential acquisition of the Chicago Board of Trade (CBOT) by the Chicago Mercantile Exchange(CME), the action has been fast and furious, with revised bids from both the CME and the Intercontinental Exchange (ICE) vying for the attention of CBOT shareholders and members.

Leadership from the CME and CBOT approved another revision to their definitive merger agreement on June 14, this time incorporating a onetime dividend of $9.14 per share for CBOT shares, and two options for CBOT full members who hold exchange right privileges (ERP) in response to ICE's sweetened bid that came a couple days earlier. The CME also uncapped the amount on legal expenses for the ERPs.

These moves follow the May 30 meeting ICE Chairman and CEO Jeff Sprecher had with CBOT shareholders and members, when he pointed out on several occasions that in putting together his competitive bid for the CBOT he attempted to mirror the CME offer in every way but price so the higher value of the ICE offer could not be readily dismissed. Since then ICE also filed for a proxy challenge with the securities and Exchange Commission that would permit ICE to communicate directly with CBOT shareholders and instruct them to reject the CME offer.

Less than two weeks after the May 30 meeting, Sprecher came back with an enhanced offer that addresses many of the concerns mentioned at the meeting including preferential fees for Class B-I and B-2 members and board representation. The price was the same, which continues to be at a premium to the CME offer ($209.85 per share vs. $192.94 per share as of June 13 closing prices) but ICE added a $2.5 billion cash component. CBOT shareholders can elect to receive cash in lieu of the combined stock based on the price at the close of the merger up to $2.5 billion. If shareholders oversubscribe, cash elections will be subject to pro ration. If it is undersuhscribed, ICE intends to use the remaining cash to repurchase ICE shares after the close of the transaction.

The enhanced offer came one day after the Department of Justice (DoJ) approved the CME/CBOT merger. In closing its investigation of the proposed merger the DOJ stated, "the evidence does not indicate that either the transaction or the clearing agreement is likely to reduce competition substantially."

Although Sprecher made a favorable impression at the May 30 meeting, what was most discussed was the ERP issue that wasn't settled to the yellow badges' liking.

Sprecher had negotiated with the Chicago Board Options Exchange (CBOE) to pay each member $500,000 for each ERP. While many members praised Sprecher for forging an agreement in the decades-long dispute, many viewed the agreement as inadequate, and several made the point that the $500,000 agreement would be a "dealbreaker, not a deal-maker." Ron Manaster, head of CBOT member firm Eagle Market Makers, questioned Sprecher's authority to negotiate on their behalf, a viewpoint reemphasized by the CBOT management.

Yet with the June 14 revision by the CME, the ICE offer might not be so sweet. Will the new CME/CBOT company have any claim on CBOE ownership, the leadership was asked. Craig Donohue, CME CEO said "Yes, but what we are intending to do is to facilitate the free assembly of the component parts necessary for people to realize full value from the CBOE exercise right interest, so we are not intending to as a company have any ownership interest ultimately in the [CBOE]. This is strictly a way to maximize participation from the ERP right for people who own these rights."

The one-time payment to the members would be done on the completion of the ERP settlement.

Donohue added that "there is a market in ERPs. And so, if people put their ERPs to the combined company, either the early put option or the early cash out option we have described, then later upon the litigation outcome or settlement, we will help facilitate third parties reassembling all the component parts such that they can maximize value from the CBOE ERP utilization, not the combined company. "

Sprecher also has said he is not surprised at the response to the ERP issue and says he is committed to resolving it, indicating the issue is open to further negotiation. He also notes CBOE Chairman and CEO Bill Brodsky probably was listening to the reaction of CBOT members. The ICE/CBOE agreement calls for each exchange to put up $332.75 million for the ERPs in either cash or equivalent stock of ICE and demutualized CBOE, which can be accessed by CBOT members holding an ERP, Class B-I membership and 27,338 Class A shares.

The enhanced offer locks in the total figure of $665 million, regardless of how many members qualify. Meaning if less than 1331 members qualify, members could receive substantially more for the ERP. There are 1331 ERPs outstanding, and currently only 823 members own all the necessary pieces to qualify.

The CME answer to the ERP could quell member concerns, and tip interest toward the Chicago exchange merger.