CME offer for Nymex leaves ICE in the cold

The potential creation of the world’s largest exchange will strengthen rivals’ urge to merge, say analysts. David Watkins reports.

The Chicago Mercantile Exchange’s (CME) $11billion offer for the New York Mercantile Exchange (Nymex) has been enthusiastically received in the energy trading space.

Yet the potential tie-up between the two bourses to create the world’s largest physical and financial futures exchange leaves many questions for competitors who may fear that such a combination will result in a squeeze on their business, such as the IntercontinentalExchange (ICE), electronic rival to Nymex.

“The CME buying Nymex is a very logical move and it was inevitable,” said Michael Cosgrove, president of Amerex Brokers, a wholly-owned division of GFI Group. “The deal would see the CME become a dominant player in the global energy markets, while the Nymex becomes part of a formidable organisation. But for ICE, I don’t know what the next move is,” he said.

Last year, Nymex’s chairman, Richard Schaeffer, said that the exchange was in discussions with several potential suitors. At the time, those firms were believed to include CME, NYSE Euronext and Deutsche Borse.

Some market commentators now believe that a combination between ICE and NYSE Euronext may be the next most likely merger.

“ICE was always a takeover candidate and I think it will probably end up with NYSE Euronext,” said Craig Pirrong, director of energy markets for the University of Houston's Global Energy Management Institute.

“NYSE wants to get into the derivatives space and now ICE is the remaining candidate for that, with ICE now being a target rather than a potential acquirer,” he said, in reference to ICE’s defeat in the bidding war with CME for the Chicago Board of Trade (Cbot), leading to last year’s creation of the CME Group.

Now the Chicago bourse has set its sights on Nymex. Trade agreements between both exchanges are already in place with many Nymex and Comex metals products listed on CMEGlobex, the CME’s electronic trading platform. Any merger would therefore have positive implications for the Dubai Mercantile Exchange, (DME) a joint venture between Tatweer, a member of Dubai Holding, Nymex and the Oman Investment Fund, said a source close to Nymex.

“Hopefully CME Group would add Dubai to the Globex platform, which would double or even triple volumes for the DME,” said the source. Analysts note that the anti-trust issues complicating CME’s bid for Cbot last year would not be factor this time around due to the different products offered by both exchanges and the fact that legitimate OTC competitors such as ICE remain.

CME and Nymex confirmed in late January that they have agreed to a 30 day exclusive negotiating period. Under the terms being discussed, CME Group, created in July by the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, would pay about $119.20 in cash and stock for every Nymex share. The negotiations, which are in “early stages,” may give Nymex shareholders about 11% more than last week's closing price, the companies said, valuing Nymex at around $11 billion.

With CME having paid $12 billion for Cbot last year, many envisage the original offer being raised substantially before Nymex accepts. “With the CME’s initial offer coming in at around $120 per Nymex share, we will probably see it go to up to $150 or even $160,” said the source.

CME Group said that it expected to maintain trading floors in the New York City metropolitan area, although many observers question for how long. The CME Group recently completed the move of Chicago Board of Trade (Cbot) contracts to its Globex platform, giving traders access on a single system to more than 95% of exchange-traded futures and options on interest rates. CME Group said in May it planned to cut $150 million in costs from the combination and generate at least $75 million in additional revenue because of increased trading.

“In public both companies will be talking about how to save the floors to keep traders on side, but behind closed doors they will be discussing how to dismantle them as soon as possible,” said the source. “It’s going to be exciting, a rival bidder will emerge, but in the end Nymex will ultimately be the winner.”

See the February issue of Energy Risk for more coverage