September 9, 2014 / 2:15 AM / 4 years ago

BGC bids $675 million for rival GFI Group, topping CME offer

LONDON/CHICAGO (Reuters) - Interdealer broker BGC Partners Inc (BGCP.O) launched a $675 million hostile bid for rival GFI Group Inc (GFI.N) on Tuesday, topping an agreed offer from exchange operator CME Group Inc (CME.O).

The bidding war sent shares of New York-based GFI up more than 14.5 percent to a four-year high of $5.76 amid expectations that CME will sweeten its offer. BGC shares touched a three-week high, while CME’s stock reached a two-week low.

BGC, which already owns about 13.5 percent of GFI, said its proposed cash offer of $5.25 per share was more than 15 percent above CME’s $4.55 per share all-stock bid in July.

CME, the world’s largest futures market operator, pursued GFI to expand its reach in the European energy and global foreign exchange markets and can easily finance a counter offer, said Michael Wong, equity analyst for Morningstar in Chicago.

“When integrated into CME Group’s operation, there’s likely to be lots of synergy that can be gained and an increase in their competitive advantage,” Wong said. “That can be worth a lot to CME Group and could be worth an increased bid.”

A CME spokeswoman declined to say whether the company planned to raise its offer. GFI also declined to comment.

Interdealer brokers match buyers and sellers of currencies, bonds and other instruments. Analysts have long expected the industry to consolidate since new regulations forced their traditional investment bank clients to reduce risky trading activities.

The industry also has faced challenges as regulators have pushed more derivatives trading onto electronic platforms in a bid to make the market more open and safer. Low interest rates also have dampened market volatility, adding to brokers’ woes.

GFI management would likely prefer a takeover by CME than BGC because competition for business and employees in the brokerage industry has left bad blood among management teams, Wong said.

However, CME will need to raise its offer significantly if it plans to stick with an all-stock deal, said Chris Geier, partner-in-charge of Sikich LLP’s investment banking practice.

“For their shareholders to see an all-cash offer at any type of a premium is a godsend for them,” he said of GFI.

Combining with GFI would catapult the enlarged BGC to a strong No.2 industry position behind market leader ICAP IAP.L, said Liberum analyst Justin Bates. He calculated that revenues from electronic and voice broking for the combined company would be just 14 percent behind ICAP’s and around 80 percent greater than those of next closest rival, Tullett Prebon TLPR.L.

“Strategically this is a very big prize for BGC and very meaningful for the industry,” Bates said.

Bates said he would not be surprised if CME submitted a revised offer that included both cash and shares. The value of a planned management buyout would also need to be raised to address criticism that the brokerage business was being sold off too cheaply, he added.

BGC said it was prepared to approach GFI shareholders directly with its offer because GFI has refused to negotiate a transaction with BGC in the past.

BGC, which was spun off from Cantor Fitzgerald LP in 2004, said its antitrust advisers Wachtell, Lipton, Rosen & Katz had determined there would be no material regulatory obstacles to its proposed deal.

“Our offer provides a materially higher, all cash price to GFI shareholders,” BGC Chief Executive Howard Lutnick said in a statement.

A GFI shareholder last month sued to block the takeover by CME, claiming that GFI executives had breached their fiduciary duties by agreeing to a deal that undervalued the company. The case is Suprina v. GFI Group Inc., New York State Supreme Court, No. 652668/2014.

GFI shares were up 11.7 percent at $5.62 in late afternoon trading. BGC shares were up 3.5 percent at $7.67, while CME stock was down 0.2 percent at $75.78.

Additional reporting by Arnab Sen in Bangalore; Editing by David Goodman, Mark Potter and David Gregorio

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