The latest twist in the battle for the Chicago Board of Trade occurred Wednesday morning as the Intercontinental Exchange (ICE) and Chicago Board Options Exchange (CBOE) announced that the two have entered an exclusive agreement regarding CBOE Exercise Rights as part of ICE’s proposed merger with the CBOT.
As part of the agreement, full CBOT members holding CBOE exercise rights would receive $500,000 in value for each right. The $500,000 payout will be split between the ICE and CBOE. Each exchange will offer $250,000 in cash to CBOT members holding rights or debt securities convertible into stock. On the ICE side that would be stock in the newly combined CBOT/ICE and on the CBOE side, common shares of CBOE after a demutualization. The agreement is contingent on the completion of a merger between the CBOT and ICE.
The package is worth up to $665.5 million, which is equal to the outstanding 1,331 exercise rights times $500,000. Only those CBOT full members eligible to use their exercise right qualify for the consideration. That means they must hold their Class B-1 membership, the exercise right privilege (ERP) and 27,338 Class A common shares. Those that hold the first two and have sold off stock can qualify if they purchase enough stock to bring them back up to the 27,338 threshold by a certain date.
After the most recent compromise between the CBOT and CBOE preceding the CBOT IPO, the ERPs were allowed to trade separately. The CBOE bought back 68 in a Dutch auction and retired those ERPs. Prior to yesterday’s announcement the most recent ERP sale was for $175,000, yesterday an ERP sold for $230,000 and the bid ask was $250,000 at $290,000.
As part of the agreement, ICE and CBOE also have agreed in principal to a broad commercial partnership where they will work jointly on technology, product development, and access to each exchange’s distribution.
The agreement puts pressure on the Chicago Mercantile Exchange, whose enhanced offer to the CBOT, which was unanimously approved by the CBOT board of directors, was still lower than ICE’s offer as well as the market price of the CBOT.
Why take less?
With the CBOT board of directors deciding to endorse the revised CME offer despite it not only being below the ICE offer but also the market price of CBOT stock, perhaps it was only a matter of time before a lawsuit was filed over the whole process. The CBOT has often been bogged down by time consuming expensive lawsuits as it has attempted to transition it business over the last several years.
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