CME beefs up CBOT bid, confident of approval

Chicago Mercantile Exchange Holdings (CME) said on Friday it increased its take-over offer for CBOT Holdings Inc, winning the vote of CBOT's biggest shareholder and apparently sealing the deal. Craig Donohue, CME's chief executive, told Reuters in a telephone interview he was "very, very confident" the deal would be approved by CBOT shareholders, who had been calling and emailing all day to voice their approval.
"There has been an absolutely overwhelming response from CBOT shareholders. This is a great development," Donohue said. The beefed-up terms, a 7 percent improvement, appeared intended to end a challenge from IntercontinentalExchange Inc, known as ICE, the upstart energy exchange that has been bidding for CBOT since March.
"This is really ... a knockout punch," said CME Executive Chairman Terry Duffy. Shareholders of the Chicago Board of Trade's parent would receive 0.375 shares of CME Holdings common stock for each share of CBOT, up from 0.350 shares in the earlier agreement, pushing their stake in the combined company to about 36 percent.
At Friday's closing prices CME's bid was worth about $11.9 billion, including a dividend to be paid by CBOT upon the deal closing, versus ICE's offer of $11.8 billion. Before the sweetened terms, ICE valued CBOT about 5 percent above CME's bid.
"CME (is) executing a skilled defence of its prize," said Edward Ditmire, analyst at Fox-Pitt, Kelton in New York. On the CBOT trading floor it was all smiles and handshakes, and just short of popping Champagne corks to toast what some traders now expect to be a convincing vote in favour of the deal. "If feels like it could pass by an 80-20 margin, maybe 90-10. I think it's a fair offer and that's all we wanted," said CBOT member Glenn Hollander of the grain merchandising firm Hollander & Feuerhaken.
CBOT officials saw a marked pickup in voting on Friday. Proxy votes can be done in person, online or by phone and will culminate in shareholder and member meetings on Monday. CME shareholders will vote and meet separately. CME and CBOT are the numbers one and two US futures exchanges, respectively, and combined would be the world's largest derivatives mart.
The new CME Group would have a market share of more than 85 percent of US futures and options-on-futures trading, including almost 100 percent in the interest rate and stock index segments. Despite some anti-trust concerns, the merger won the blessing of the US Justice Department in June after a drawn-out investigation. "We will be a force to be reckoned with," Duffy said.
Australian-based Caledonia (Private) Investments Pty. Ltd, which owns about 6.5 percent of CBOT shares, said it was encouraging shareholders to vote "yes" after earlier opposing the bid as too low. "We fully endorse this merger," William Vicars, managing director of Caledonia, said in a statement.
Donohue said CME had been in "regular contact" with Caledonia for about two years, knowing that the firm, which manages about $3 billion in Australian and global stocks, could play a swing role in CBOT's future.
Several CBOT shareholders said they had been looking to Caledonia for direction on how to vote, and now have their answer - leading some to declare the bidding war for CBOT over.
"The chance of ICE winning CBOT is very small at this point," said Rick Wetmore, a portfolio manager at Turner Investment Partners in Berwyn, Pennsylvania, which has $25 billion in equities under management. "The CME has the financial muscle and the desire to make this happen ... the synergies are so strong that CME can afford to pay more," said Wetmore, who owns shares in CME and ICE.
In late trading on the New York Stock Exchange, CME shares were up $15.90 or 2.9 percent at $571.57. CBOT jumped $19.07, or 9.2 percent, at $225.03, while ICE was up $3.85, or 2.5 percent, at $155.66.