* CME to pay $126 mln in cash; deal to close later in 2012
* Deal to bolster volume in CME's and KCBT's wheat contracts
* ICE declines comment on whether it was in talks with KCBT
* Minneapolis Grain Exchange seen ripe for takeover, though
By Ann Saphir and Carey Gillam
CHICAGO/KANSAS CITY, Mo., Oct 17 CME Group Inc
on Wednesday agreed to buy the Kansas City Board of
Trade for $126 million in cash, cementing CME's dominance in
world grain futures markets and keeping rival
IntercontinentalExchange from gaining an important
It is CME's first exchange purchase in five years since it
wrapped up a buying spree that put the Chicago Mercantile
Exchange, the Chicago Board of Trade and the energy-focused New
York Mercantile Exchange all under its control.
The deal comes as the Chicago-based giant faces one of the
biggest challenges yet to its benchmark wheat, soybean and corn
contracts: ICE's renewed efforts to build its agricultural
markets business, including the launch this year of look-alike
U.S. grain futures that opened a new front in the decade-long
battle for commodity derivatives dominance.
So far, ICE's copycat contracts of ICE's electronic exchange
have garnered little volume. But CME has responded swiftly to
protect its lucrative grains franchise, a mainstay of global
markets for decades, expanding trading hours to keep step with
ICE in a move some floor traders have protested.
In Kansas City, a dozen or so traders, many clutching the
electronic pads now used to execute most trades, gathered on the
red and blue steps of Kansas City's modest trading floor to
watch a single lot of the exchange's hard red winter wheat
futures contract trade the old-fashioned way, with cries and
hand gestures, rueing the likely closure of the pit next year.
And at the Minneapolis Grains Exchange (MGEX), which shut
its futures floor four years ago, dealers speculated that it was
only a matter of time before ICE made a bid for the last
independently owned U.S. agricultural marketplace.
"The CME is taking an aggressive stance to firmly establish
itself as the world leader in exchange-traded products, so this
isn't a surprise," said Ken Smithmier, market analyst for The
Hightower Report, a Chicago-based research and advisory firm.
But one thing did surprise him: "I thought Minneapolis would
be the first to be gobbled up."
CME beat out several rivals before clinching the deal, KCBT
President Jeff Borchardt told reporters on a conference call.
He did not name the other bidders, but most traders believe
ICE was a leading contender. In 2007, ICE lost out to CME in a
bidding war for the CBOT.
The deal will be a windfall for the owners of 192 seats on
the Kansas City Board of Trade, with the CME paying as much as a
47 percent premium over their collective value, estimates Thomas
Caldwell, CEO of Toronto-based Caldwell Asset Management, which
owns 13 seats.
KCBT seats trade in a private market, with one membership
recently fetching $480,000. CME's $126 million purchase price
values each seat at $656,000. KCBT will also pay a dividend that
Caldwell estimates will be $30,000 to $50,000 each.
'CIRCLE OF LIFE'
Several traders gathered in the storied KCBT wheat pit on
Wednesday for the closing bell, with many laughing and
alternately cursing when only one lot of a December/March spread
traded in the open outcry auction while the rest of the action
took place off the floor via computers.
"It was inevitable," options trader Markus Groebner said on
the KCBT floor. "It is a sign of the times. That is what it is."
Many on the floor were downcast, fearing lost jobs and lost
The deal will bolster volume in both CME's and KCBT's wheat
contracts and provide new trading opportunities, CME Executive
Chairman Terrence Duffy said. Soon to be added are options on
spreads between the two contracts, CME's top commodities
executive told reporters.
Kansas City's wheat contract is for "hard red winter" wheat,
a variety that is grown on twice as much U.S. farmland as
Chicago's "soft red winter" brand - but which has long lagged
behind its more liquid rival in terms of volume.
Soft red winter wheat is used primarily to make cakes; hard
red winter wheat for rolls.
Traders said that CBOT's contracts, which are a global
benchmark, offer the best approximation of all the different
types of wheat varieties that are grown around the world.
In September, CBOT wheat volume rose 5 percent from last
year to some 1.5 million contracts, while KCBT's turnover fell
more than 30 percent to under 290,000 lots. Current open
interest in CBOT wheat is 462,288 contracts, nearly three times
as big as KCBT wheat's open interest of 158,180 contracts.
The Minneapolis futures contract is based on a third
variety, spring wheat, that is also a major North American crop
- but futures trading is even less active than in Kansas City.
Unlike the KCBT or CBOT, MGEX wheat is only traded
electronically. Both exchanges already use CME's trading
Spring wheat is used for pizza dough.
MGEX President and CEO Mark Bagan declined to comment on any
possible merger talks, but said that his exchange will evaluate
News of the acquisition sparked speculation that the
Minneapolis Grain Exchange could now be in line for a bid.
An ICE spokeswoman declined to comment on whether it had
been in talks with KCBT or was in talks to buy the Minneapolis
Some traders said a deal seemed inevitable.
"You would think that MGEX would look like a ripe target for
some type of merger or acquisition, if nothing else because we
are essentially a North American spring wheat contract, and the
combined North American spring wheat is huge, even bigger than
the U.S. hard red winter wheat crop," Austin Damiani, an analyst
at Frontier Futures in Minneapolis, said, referring to combined
U.S. and Canadian wheat production.
Asked about the possibility of a bid for MGEX, a CME
spokesman said: "We remain focused on completing this
transaction, as we believe it will create significant value for
customers and shareholders of both companies."
Caldwell, who owns 37 MGEX seats in addition to his KCBT
seats, was dismissive of the suggestion that Minneapolis might
be next, calling management there "myopic," and adding, "we're
pretty annoyed at the bunch."
CME's purchase is expected to close later this year, subject
to approval by KCBT shareholders and regulators.
The KCBT will make a special distribution of excess cash to
members when the deal closes, CME said in announcing the deal. A
KCBT official declined to give a figure, but said it would be
CME shares closed up 40 cents to end the day at $57.89 on
the Nasdaq. ICE's stock dropped 83 cents to $130.59 on the New
York Stock Exchange.
As part of the deal, CME has agreed to keep the Kansas City
market's trading floor open for at least six months.
CME's Duffy noted that CME has kept its Chicago trading
floor open for much longer than many observers had expected and
said there were no set plans to shut the floor if it still
The trading floor at the KCBT is a fraction of the size of
Chicago's. Until just a few years ago it was buzzing and
bustling, packed with frenetic traders, who fought their way in
and out of the packed circular pit.
Trading floor lore includes the story of an old-time trader
who suffered a heart attack in the midst of a particularly busy
trading session. He was attended to, but the pit action barely
paused as fellow traders took orders out of his pockets and
continued shouting and gesticulating to make sure his trades got
One trader, who has been trading wheat futures since 1978,
said the buyout by CME marks the end of an era.
"The floor used to be vibrant," he said. "Now, it is nothing
in terms of volume. That is a sad thing to me. I'm not adverse
to change. And I do most of my stuff on the screen now anyway.
But we've got 156 years of history here. It's sad to lose that."