NEW YORK CME Group Inc (CME.O) will acquire 90 percent of the Dow Jones' namesake indexes business in a debt-funded joint venture that values the century-old business at $675 million.
Dow Jones will retain a 10 percent stake in the venture, called CME Group Index Services, which will raise some $613 million in third-party debt, the companies said on Wednesday. Dow Jones will get $607.5 million of the proceeds.
The Dow name will remain to preserve the familiar Dow Jones Industrial average .DJI brand, under the terms of the deal with Dow Jones & Co's owner News Corp (NWSA.O). The brand was created in 1896 by Charles Dow, a company founder.
The deal gives Chicago-based CME Group, the world's largest derivatives exchange operator, a key asset beyond 2014 when its exclusive right to offer futures on the Industrial average and other Dow indexes would have expired.
"We would expect to continue to have very, long-term license rights," CME Group Chief Executive Craig Donohue said on a conference call with reporters, adding 90 percent of the joint venture's earnings will flow directly to CME.
The growth and profit margins of the index business make it "very attractive," Donohue said.
CME Group will contribute a portion of its market data services, valued at $613 million, to the joint venture. Dow Jones will continue to own the brand.
The joint venture represents just 3 percent of CME Group's revenue and is a fraction of its $18 billion market cap.
"It is just not that exciting strategically given the size," said Mark Lane, a Chicago-based analyst at William Blair & Co.
Dow Jones Indexes creates and licenses indexes that investors and others use to measure the performance of markets, including stocks, bonds and real estate. The business offers more than 130,000 equity indices, according to its website.
The deal is expected to close in the current quarter.
While the shares of both CME Group and News Corp were little changed in post-market trading, some saw the deal as a way for the exchange operator to protect trading volumes and spark indexing growth.
"In combination with that brand and the recognition of the DJI, as well as market expertise put together, the CME will have a much larger global reach," said Joseph Cusick, senior market analyst at brokerage optionsXpress in Chicago.
CME Group currently pays Dow Jones licensing fees that let it offer futures and options contracts based on the Dow industrials. The deal gives it these rights and also represents yet another proprietary product for the company whose core business relies on products that cannot be transferred to other exchanges.
"The threat is that you wake up one day and realize that (Dow) negotiated with another exchange, and the index goes somewhere else and you lose volumes on those contracts," said Diego Perfumo, an analyst at Equity Research Desk.
The structure of the deal, which creates a so-called leveraged partnership, has been used more frequently of late as it comes with tax advantages for both sides. It was used by the Ricketts family when it took control of the Chicago Cubs baseball team in a $845 million deal.
Such a structure, however, works only in situations where the buyer has the capacity to effectively make the purchase with debt, as CME Group did in this case.
Barclays Capital (BARC.L) advised CME Group and Goldman Sachs Group Inc (GS.N) advised Dow Jones on the deal.
(Additional reporting by Ann Saphir, Paritosh Bansal and Angela Moon; editing by Robert MacMillan, Leslie Gevirtz)