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CBOT - CME Confident On CBOT Deal, Not Reviewing Offer
March 22, 2007 14:48 ET (18:48 GMT)
(Updates throughout. Adds comments from analysts and latest share prices.)

By Jesse Thomas and Stephen Wisnefski Of DOW JONES NEWSWIRES

CHICAGO (Dow Jones)--The chief executive of Chicago Mercantile Exchange Holdings Inc. (CME) remains confident that the U.S. Department of Justice will sign off on its merger proposal with CBOT Holdings Inc. (BOT), and that the deal will close by the end of the first half of this year as planned.

Speaking Thursday during a conference call with analysts, CEO Craig Donohue also said that CME doesn't see any need to address the valuation of its offer for CBOT, because the counteroffer from IntercontinentalExchange Inc. (ICE) is "significantly inferior" to the CME-CBOT agreement

"CBOT shareholders are being offered a minnow-trying-to-swallow-the-whale alternative, fraught with execution risk and overstated synergies," Donohue said of ICE's offer, adding that ICE has exaggerated the regulatory hurdles that the CME-CBOT deal faces.

Atlanta-based ICE, an electronic marketplace that focuses on energy trading, a week ago announced an all-stock offer for CBOT valued at about $9.7 billion based on current share prices, or 12% higher than CME's bid. ICE's offer has led to uncertainty about the merger agreement between CBOT and CME, which was first announced last October and would create the world's largest derivatives exchange. Several analysts have said that CME would likely be forced to increase its offer to keep the deal with CBOT on track.

Richard Herr of Keefe, Bruyette & Woods, said Thursday that, even though CME management did a convincing job of saying it feels its offer is fair, he still thinks there's a 50/50 chance the exchange will raise its bid. Howard Chen of Credit Suisse agreed that a higher bid could be justified, pointing out in a note to investors that CBOT's earnings power "has vastly improved" since the deal with CME was announced.

ICE Responds


The battle between ICE and CME, which are under pressure to expand quickly through consolidation, illustrates how hot a commodity CBOT has become. CBOT in recent years played second-fiddle to its faster growing hometown rival, but in recent months has seen a surge in trading volume, particularly in its agricultural products.

In the wake of the offer from ICE, CBOT shares have hit a string of record highs, moving as high as $199.70 during Wednesday's session. The stock was down 1.4% at $194.39 in recent trading, while CME was up 1.2% to $547.11 and ICE was down 0.6% to $129.04.

In response to Donohue's latest comments, ICE issued a press release with point-by-point rebuttals on the main criticisms made by CME.

ICE noted that it has smoothly integrated two exchanges through acquisitions, while "CME has no integration experience." The exchange also reiterated that has the flexibility to add a cash component to its CBOT offer, and that it expects to discuss that alternative with the Chicago exchange.

"CME's increasing attempts to discredit ICE don't change the fact that our offer is clearly superior - the ICE offer provides much higher current value, is pro-competitive, and will create a stronger business that we believe is better positioned for future growth," ICE said in its statement.

CME Meeting With CBOT Members


CME executives will meet with CBOT members and shareholders later Thursday to outline the weaknesses CME sees in the competing proposal. In the wake of ICE's bid, several members have said that the decision on whether to back the CME-CBOT agreement has become more difficult.

CBOT's board of directors on Monday gave authorization for the exchange to begin discussions and exchange information with ICE. CBOT, which has postponed its shareholder and member votes that were previously scheduled for April 4, said it stands by its current deal with CME. CBOT has said that it has "not withdrawn, modified or qualified" its recommendation that CBOT shareholders and members vote in favor of the CME deal.

Donohue reiterated Thursday that CME has "a definitive merger agreement" with CBOT and continues working toward integration. "We believe that CBOT's board will conclude, as we have, that (ICE's proposal) is inferior."

Donohue said that "ICE adds little or no value to CBOT as a merger partner or valuable currency," adding that a deal with ICE would limit CBOT's comparative future growth potential. He also said that the six-year-old Atlanta exchange could face difficulties in successfully completing a large-scale merger and integrating its operations.

Speaking during the same call, CME Chief Financial Officer James Parisi cast doubt on ICE's ability to obtain the $240 million in annual cost savings it says are possible through a deal with CBOT. "We believe the realistic estimate of synergies is about 55% to 75% lower than what ICE is portraying," Parisi said.

CME Refutes ICE On Exercise Rights, Metals


CME executives also refuted ICE's claims that its deal with CBOT would resolve a dispute between CBOT and the Chicago Board Options Exchange regarding exercise rights, which allow CBOT members to become members of the CBOE without purchasing a membership seat.

CBOT, which has filed a lawsuit against CBOE, is seeking to uphold its members' rights, which could give them access to CBOE stock and dividends as the options exchange transitions to shareholderholder-owned from member-owned status. CBOE is seeking approval from the Securities and Exchange Commission to extinguish the CBOT exercise rights, suggesting that CBOT will no longer have "members" as defined by the charter that created the right, following CBOT's merger with CME.

"We do not believe there is any concern with respect to the exercise right," Donohue said Thursday. The ICE proposal "offers nothing different or new" and doesn't provide a "guarantee" of preservation of the exercise rights.

In a new wrinkle to the dispute, however, Donohue added that CME would "consider an alternative structure if the CBOE says that structure will preserve the exercise right."

CME also disputed the idea that it has decided to abandon CBOT's metals trading business as part of the merger. CME established a partnership last year with Nymex Holdings Inc. (NMX) to trade energy and metals contracts on CME's Globex electronic platform.

"We have not made any determination on the CBOT's metals business," Donohue said.

ICE said in its proposal that it would "protect and grow the CBOT's metals complex," but Donohue said Thursday that nothing should be read into what ICE has said regarding its support of CBOT's metals business.


-By Jesse Thomas, Dow Jones Newswires; [phone]; [e-mail]

-By Stephen Wisnefski, Dow Jones Newswires; [phone]; [e-mail]


(END) Dow Jones Newswires

March 22, 2007 14:48 ET (18:48 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.- - 02 48 PM EDT 03-22-07