ICE-CBOE trading rights deal new threat to CME bid

CHICAGO (Reuters) - The struggle for CBOT Holdings BOT.N took a new turn on Wednesday when unsolicited bidder IntercontinentalExchange Inc. ICE.N reached a deal that could resolve the parent of the Chicago Board of Trade's long-running trading rights dispute with the Chicago Board Options Exchange.

Traders work in the soy bean pit at the Chicago Board of Trade in a file photo. IntercontinentalExchange Inc. said on Wednesday that it had enhanced its bid for CBOT Holdings by reaching an agreement that might resolve that company's dispute with the Chicago Board Options Exchange. REUTERS/John Gress

ICE, the Atlanta-based energy exchange, is vying with Chicago Mercantile Holdings Inc. CME.N, the largest U.S. futures mart, to buy CBOT.

Now CBOE, the largest U.S. options exchange, seems to have put its support behind ICE, which threw a wrench into the planned CME-CBOT deal with its unsolicited bid in March.

“This puts the monkey on the Merc’s back,” said Larry Blum, a long-standing member of the CBOT and a former CBOE vice chairman.

The agreement centers on “exercise rights” that allow full members of CBOT to trade options on the CBOE without owning a CBOE membership. The rights were created when CBOT spun off the options exchange in 1973.

CBOE has said a CME-CBOT merger would invalidate the rights by fundamentally changing the essence of what a “CBOT member” is. CBOT and CME have vowed to protect those rights.

Wednesday’s agreement calls for each full member of CBOT to receive $500,000 for each trading right, for a total payment of up to $665.5 million, if ICE succeeds in buying the company.

By contrast, ICE said, the CME deal “provides no value for the exercise right eligibility of CBOT members, and no certain resolution to this critical issue.”

CBOE and ICE will share the cost equally, paying cash or securities.

Analyst Edward Ditmire of Fox-Pitt, Kelton in New York said ICE had effectively raised its already-higher bid for CBOT by about 3 percent.

“Overall (this) positions ICE better in terms of its bid,” he said, “though it is unclear how far ICE would have to improve on the CME offer to be deemed a superior bid by CBOT management.”

Based on Tuesday’s closing share prices, the ICE bid for CBOT was about 14 percent higher than CME’s, which earlier this month was sweetened by 16 percent from the terms announced in October.

On May 11, CBOT’s board endorsed those updated terms, saying a combination with CME offered greater overall benefits to shareholders and members and less “integration risk” than a combination with ICE.

A combined CME and CBOT would create the world’s largest derivatives exchange, with upwards of an 85 percent share of U.S. futures and options-on-futures trading.

At an industry conference in late 2006, CBOE Chief Executive William Brodsky criticized the “artificially maintained monopoly” allowed in the futures industry.

The proposed CME-CBOT deal is under review from the U.S. Department of Justice and is subject to approval by CME shareholders and CBOT investors and members in votes slated for July 9.

On Thursday CEO Jeffrey Sprecher and other top ICE executives will meet with CBOT members in Chicago to discuss the bid.

In midday trading on the New York Stock Exchange, ICE shares were up 60 cents at $148.35. CME was down $2.53 at $523.49, and CBOT was up $4.53, or 2.4 percent, at $197.50.

Additional reporting by Jonathan Keehner in New York and Doris Frankel in Chicago