Investors pushed the shares of parent CBOT Holdings to a record high in anticipation of a sweetened offer by Chicago Mercantile Exchange Holdings.
The unsolicited bid by Atlanta-based ICE , a relative upstart in the futures and commodities industry, comes less than three weeks before CBOT shareholders are scheduled to vote April 4 on an all-Chicago deal. The Merc's parent company and its century-long rival agreed last October to unite and form the world's largest futures exchange, with CME paying $8 billion.
The proposed new combination would create a derivatives leader with about a third of the U.S. market in commodities trading. It would be smaller, however, than a Board of Trade-Merc powerhouse, which has raised concerns about the potential for a monopoly and higher prices amid careful scrutiny by the Department of Justice.
The new offer, while not immediately accepted or rejected by the Board of Trade, amounts to what at least one analyst called a "semi-hostile" bid.
"ICE's bid very much complicates the CME bid," said Robert Rutschow of Prudential Equity Group in a note to investors. "The big winner in this seems to be CBOT shareholders, who could pressure either a higher bid from CME, and at a minimum have more strategic options going forward."
CBOT declined to comment on the offer, while CME issued a terse statement voicing confidence in its merger effort and avoiding the question of whether it will raise its bid. "We are working toward the successful completion of our transaction," the company said.
The Board of Trade is the main U.S. bond market, but it still trades grain, as it has since its founding in 1848. CME has gone far beyond its trademark livestock contracts to become the world's largest derivatives exchange.
ICE was established in 2000 as an over-the-counter market and has since become the world's leading electronic marketplace for energy trading. It acquired London's International Petroleum Exchange in 2001 and bought the New York Board of Trade earlier this year for more than $1 billion, moving into other commodities such as cocoa, coffee, orange juice and sugar futures.
As under the Merc's proposal, ICE said the combined new firm would be headquartered at the Board of Trade's historic building in downtown Chicago.
Sprecher said the bid offers not only a higher price but greater assurance that it will pass muster with regulators.
"Hopefully they will see the superior nature of our proposal," Sprecher said on a conference call. "A billion dollars in market value above the previous transaction, just on price alone, is superior."
Asked if the company would pursue a hostile takeover if the bid is rejected, he said, "We'll just have to wait and see." He said ICE is prepared to include cash in the deal if requested.
Combining CBOT and ICE would bring $240 million in annual synergies, Sprecher said.
Winning Over Shareholders
Several analysts suggested that the Mercantile Exchange's parent may still prevail, especially if it raises its bid.
"CME has significantly more power to outbid ICE," said Richard Herr, an analyst with Keefe, Bruyette & Woods. "It's just a matter of how much or how quick CME wants to raise its offer to make sure its deal goes through."
Under terms of the deal, ICE would issue 1.42 shares for each CBOT Class A common share. That would be worth $187.34 each based on ICE's Wednesday's closing stock price, nearly an 11% premium to the current value of the pending CME/CBOT transaction.
But the value of the offer declined somewhat as investors drove down ICE's stock price after the announcement.
Some analysts noted that while ICE's deal might go over better with federal regulators, it could have a harder time winning over both shareholders and executives in Chicago. The two locally based exchanges have been working more closely together recently, and some traders also reportedly are worried about the prospect of additional job losses under ICE, which took the London exchange all-electronic after acquiring it.
"It's a (matter of a) cultural fit as well as the financials," Herr said.
Patrick O'Shaughnessy of Morningstar said CME is unlikely to give up on the merger without a fight. However, he said: "Just based on the merits of the offer, I wouldn't be totally shocked to see the Board of Trade accept the CME offer as is."
ICE said CBOT shareholders would own about 51.5% of the combined company, and promised to commit to the same terms as the CME offer regarding CBOT's open auction markets. ICE also said it would expand CBOT's metals complex.
The exchange said it believes the deal between the two companies could be completed in the third quarter. It forecast that such a deal would add to cash earnings per share within 18 months of closing.