CHICAGO CME Group Inc CME.N, the world's largest derivatives exchange, hopes to broaden its reach by buying energy and precious metals mart Nymex NMX.N for $11 billion, the companies said on Monday.
The proposal keeps up a breakneck pace of consolidation among U.S. and global financial exchanges, many of which have staged successful initial public offerings in recent years.
Under the terms being discussed, Chicago-based CME would pay Nymex Holdings Inc shareholders $36 in cash and 0.1323 of a CME common share for each Nymex share owned.
Based on CME's closing price on Friday, the preliminary offer values Nymex shares at roughly $119.22 each, an 11 percent premium to Nymex's closing share price on Friday.
"We expect this deal to be a positive to both CME and Nymex shares," said Edward Ditmire, analyst at Fox-Pitt Kelton in New York.
CME Group was created in July 2007 when Chicago Mercantile Exchange Holdings bought the Chicago Board of Trade, then its biggest rival among U.S. futures exchanges.
"There is massive consolidation going on in the industry. This is another great sign of that," said Michael Henry, senior executive at Accenture's Capital Markets practice in New York.
Nymex, or the New York Mercantile Exchange, is the world's largest physical commodity futures exchange with more than 130 years of trading history. It went public in November 2006.
The exchange trades an array of energy contracts, including crude oil, gasoline, natural gas and electricity, and precious metals such as gold, silver and copper through its Comex division.
With Nymex in its stable, CME Group would control about 95 percent of U.S. futures and futures on options volume.
ALL OK WITH DOJ?
Still, Nymex's products have little overlap with CME's strengths in interest rates, foreign exchange, stock index and agricultural commodities such as grains and livestock.
So many analysts expect little pushback from the U.S. Department of Justice, which would need to approve the deal. The CME-CBOT deal endured a lengthy DOJ review, partly because of the overlap in the two exchange's interest rate derivatives products.
Michael Keeley, a partner at Axinn, Veltrop & Harkrider LLP in New York, said he expects the antitrust review of the proposed deal could be completed before the administration of George W. Bush leaves the White House in January 2009.
CME Chief Executive Craig Donohue, speaking on a panel at the exchange on Monday, said CME would not second-guess the outcome of the DOJ review.
Donohue added that U.S. regulators "understand we have a broad array of existing and potential competitors."
Still, some see the deal as another move toward "disintermediation" in which giant exchanges attempt to cut out the middlemen, the brokerage firms, and perform more of the firms' functions internally.
"If you have this kind of super U.S. futures exchange -- wow," said Patrice Blanc, CEO of brokerage firm Newedge Group, formed by the merger of Societe Generale's FIMAT unit and Calyon Financial. "Looking five or six years ahead, this trend is a little disturbing."
A merger of the two biggest remaining U.S. futures marts has been rumored since CME finalized its purchase of CBOT.
Nymex listed many of its products on CME's Globex electronic trading platform starting in June 2006, fueling expectations that a closer relationship would follow.
Keeley said the antitrust attorneys hired to shepherd the deal would probably argue that despite the huge market share at the combined exchange, the rise of electronic exchanges would reduce CME's market dominance.
"Given the trend in exchanges in general, the barriers to entry to electronic trading are low," he said.
Nymex has a spirited competitor in energy derivatives, Atlanta-based Intercontinental Exchange Inc (ICE.N). Over the counter energy derivatives trading is also thriving.
Ditmire said CME "has probably given itself room to improve the bid, if necessary, and still complete the acquisition on attractive terms."
Nymex shares closed up 8.7 percent at $116.50, while CME fell 0.6 percent to $625.00 in New York Stock Exchange trade.
CME said the preliminary terms would see it maintain trading floors in the New York City area, but did not vow to maintain the current Nymex facility in downtown Manhattan.
(Additional reporting by Lilla Zuill, Janet McGurty and Gene Ramos in New York, Diane Bartz in Washington and Christine Stebbins in Chicago; Editing by Braden Reddall)