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CBOT Holdings (BOT)
CBOT Holdings Up 13% After New Takeover Bid Announced
Winter has barely ended and Chicago is already heating up. Six months after the Chicago Mercantile Exchange (CME: Charts, News, Offers) agreed to buy cross-town rival Chicago Board of Trade's parent company, CBOT Holdings (BOT: Charts, News, Offers), the Intercontinental Exchange made an unsolicited bid of $9.9bn in stock to acquire the company instead. The news was a big surprise, and might be the first salvo in a potential bidding war. What should investors be watching for over the next few months, and just how high will the bidding war take things?
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| Daily Chart |
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| Stock Analysis |
The Chicago Board of Trade has come a long way since 1848. As the oldest of the futures and options exchanges, it has seen investment move from the open outcry trading to sophisticated electronic platforms, and has seen trading volume rapidly expand as more and more investors look into commodity trading as a hedging tactic. As a dominant player in the energy trading market, instability abroad and increasing demand for energy has helped it see more and more trade commissions pouring in through its doors. CBOT Holdings, which launched its IPO in 2005, has seen share prices surge from $54 to the current level of $188, and has watched as its 4Q sales climbed 48%. Exchange fees rose by 56% during the quarter, representing a 36% in trading volume.
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The move by ICE to consolidate the two electronic futures companies would bring roughly one-third of the US commodity trading market under one roof. While this is somewhat short of interstellar domination, the growth potential of commodity trading will certainly bring about a powerful company able to rake in a lot of profits. December figures for CBOT Holdings showed a 33% increase in trades, and company predicted strong growth over the next few years to the tune of 20%. CBOT's pre-tax earnings projections for 2007 came to $343m and $413m for 2008.
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With the new bid by ICE, how hot is a deal going to get? First, CBOT Holdings hasn't replied to the offer just yet. Investors seem to think that the $9.9bn - nearly $2bn over the CME bid - dangling in front of them will be enticing enough to make CME counter it. They are confident enough in the possibility of a bidding war as to jack the price of shares up by as much as 16% during Thursday trading. Secondly, CME and CBOT Holdings are relatively far into the agreement-creation process, but not nearly as far that investors wouldn't vote it down if they thought they could get more through some bidding competition. Shareholders are set to vote on the CME and CBOT Holdings deal on April 4th.
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For ICE, the speed of getting this deal through is going to be the big factor. CME has more resources, and thus could outbid them in the long-run, but could hang in long enough as to make CME second guess itself. For CBOT Holdings: the more guessing the better. With the ICE deal nearly $2bn better than what it was offered last October, the possibility of a sweetener by CME is a very likely bet. How much the sweetener will swell to becomes the question, but it will certainly be a premium to Thursday's proposal. CME shareholders are expecting an increased premium as well, since the news sent shares down more than 4%.
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Profile |
The Chicago Board of Trade is the world's third-largest derivatives exchange. In 2005, the CBOT became a private company under the CBOT Holdings corporate name. Fifteen percent of all global listed futures and options on futures contracts traded on its platforms last year. The mainstay of its business is its acting as a marketplace for the exchange of U.S. Treasury futures and options products, and the company traded about 554 million of these kinds of contracts in 2005. Last year the CBOT also traded 92 million agricultural futures and options on futures contracts, a large part of the North American market.
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