CME snags a big prize as NYMEX deal approved

NEW YORK/CHICAGO Mon Aug 18, 2008 8:41pm EDT

NEW YORK/CHICAGO (Reuters) - CME Group Inc's (CME.O) stranglehold on the U.S. futures market grew tighter on Monday with the approval of its $7.7 billion purchase of energy and metals trading market NYMEX Holdings Inc NMX.N.

The Chicago-based company will now control some 98 percent of the trading in U.S. futures and options on futures, and many analysts expect its next target will be overseas.

CME has said the NYMEX transaction will close on Friday.

The deal, announced in January, was contentious among some members at the New York Mercantile Exchange, who complained it undervalued NYMEX at a time when energy derivatives trading volume has been exploding.

Those members threatened to scuttle the bid, even as late as last week. In the end, intense lobbying and a sweetened payout from CME secured 650 member votes in favor, or about 80 percent, above the 75 percent threshold it needed.

"I think '75 percent plus one vote' is a great victory. The rest is irrelevant. The CME was able to get a super majority as they presented a strong proposition," said Diego Perfumo, an analyst at Equity Research Desk.

The NYMEX purchase comes just 13 months after CME swallowed the Chicago Board of Trade in July 2007, which at that point was the second-largest U.S. futures exchange.

It will end a short run for NYMEX as an independent, publicly traded exchange. The New York mart staged a long-awaited initial public offering in late 2006.

"CME wants this so badly because the futures market is ... one of the few monopolies left in the world," said Brad Hintz, an analyst at Sanford Bernstein. "And it's a monopoly because they have their own clearing operation."

Unlike equities and equity options, futures contracts are not "fungible," meaning positions established at one exchange can not be offset at a competing exchange.

PIECEMEAL OFFERINGS

CME's offer of $36 and 0.1323 of a CME share for each NYMEX share has remained unchanged since the proposed deal was first announced in January. But because CME shares have fallen some 50 percent this year, the deal's value is down about $3.6 billion from the original price of $11.3 billion.

In an effort to win over critics, CME last month increased the proposed payments to NYMEX members, slashed the "golden parachutes" being offered to NYMEX executives, and promised to maintain the New York trading floor at least until 2012.

Last week, some members reacted angrily when it was revealed that the $750,000 payout would likely be taxed as "ordinary income," instead of as lower-taxed "capital gains."

Outspoken NYMEX member Robert Sahn, who originally opposed the deal, said on Monday he expects fellow members to push for an Internal Revenue Service ruling on how to tax the payout.

"I think a lot of people are going to try to get an IRS ruling that it is long-term capital gains," Sahn told Reuters.

DOMINATION ACROSS ASSET CLASSES

Adding NYMEX's dominant energy and metals contracts will broaden CME's product mix, which already includes contracts based on U.S. interest rates, stock indexes, currencies, agricultural products and even esoteric products such as those based on weather patterns and housing prices.

CME could expand its horizons further, said Michael Henry, an exchange-strategy consultant at Accenture.

"They have yet to do a global deal, or an acquisition in a different asset class," Henry said.

In heavy after-hours trading, CME shares rose to $339, up 0.8 percent. NYMEX shares rose 1.7 percent to $81.35.

CME has promised millions of dollars in cost savings once the exchanges are integrated.

Talking to reporters, company officials said the role of top NYMEX executives in the combined company had not been determined. Most of CBOT's top officials were cut in 2007 once the CME deal was completed.

(Additional reporting by Phil Wahba in New York; Editing by Andre Grenon and Braden Reddall)

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