By Yaser Anwar, CSC of Equity Investmen Ideas
- Last week ICE made a proposal to merge with the Chicago Board of Trade in a transaction valuing each BOT share at $187.34 based on last Tuesday’s closing price of ICE shares. CME, which BOT has signed a merger agreement, a combination of 0.3006 shares of CME with a present value of approximately $160.18, with an elective $3 billion max cash component.
- While a CME and CBOT merger would join the interest rate contracts at CBO and short dated contracts CME, while concentrating the trading of US interest rate futures on one exchange, I don’t believe that the DoJ would look differently at ICE-BOT synergies and concentration in agricultural products.
- I believe that this transaction makes sense with respect to products, ICE also offers a less risky play on the BOT member’s exercise right at the CBOE, there are revenue and potential expense synergies between the two exchanges and ICE’s higher offer price.
- Furthermore, the ICE-BOT transaction could produce greater synergies than the CME-BOT due to the companies’ proximity and trading floor consolidation, and I find Merc’s $125 million cost synergy estimate somewhat conservative.
- ICE argues that under its proposal, BOT members would own 51.5% of the combined company and therefore would not forfeit their exercise rights at the CBOE. I believe the ICE structure does make it better for the CBOT member to maintain his/her CBOE exercise right. However, I don’t believe right holders lose their exercise right in the CME/BOT merger either (but it will require litigation unless the parties can come to a compromise).
- I believe ICE is one of the best ways to to gain direct exposure to the secular growth in electronic commodities trading. I think that the OTC and NYBOT products will continue to be sources of upside as algorithmic traders increase participation in these areas.
- The Street views this mix shift towards algorithmic trading as a positive for volumes and revenues, investors can also expect to see a gradual decline in rate per contract over time with continued market maker discounts, similar to CME.
Looking to Network with People in the Financial Industry
- ICE’s EPS estimates are $3.44 07, $5.30 08 and $6.84 09. Recently a couple of brokers decreased the EPS thanks to weaker-than-expected energy rate per contract, and a reduced run-rate for NYBOT volumes.
- Rate/Contract: ICE provided monthly RPC data for energy futures, which showed pressure from Q4 06 ($1.33, higher than expected, $1.28). While ICE has not changed its pricing for futures, it does provide incentive pricing for market-makers and high-velocity traders. The decline in RPC appears to be a result of a mix-shift to traders with discounted pricing.
- Energy Volume: While volumes continue to grow at a solid rate (futures at 93% and OTC at 90%), the sequential decline in volatility resulted in weaker than expected volumes.
- Investors should consider risks such as (a) competition from other exchanges (especially NYMEX), (b) ICE is dependent on volume and market liquidity which could decline (BOT merger should help here).
- (c) ICE is dependent on volatility in energy commodity prices, (d) volume is concentrated in a few contracts and a decline in volume in any contracts could hurt results, (e) if ICE acquires or creates its own clearinghouse it will have risks associated with a clearinghouse.
- Stock Pickr– click on symbols for institutional holders- ICE, BOT & CME.
Top Gaining Stocks
Top Losing Stocks