CME casts its eye in Nymex’s direction

The world’s biggest futures exchange did not even pause for breath. About an hour after the CME announced on Monday morning that it was in preliminary talks to buy Nymex, the company put out another statement, saying it had completed its electronic integration with the Chicago Board of Trade, which it purchased last year. As one $11bn acquisition was being digested, a fresh $11bn purchase was put on the plate to be swallowed.

The exchange sector has seen a spate of mergers in recent times as smaller competitors are swallowed up and the larger players, who can afford the best technology, prosper.

The pace of consolidation continues to be furious and speculation is rife. Recent deals have been signed involving exchanges including NYSE and Euronext, Nasdaq and OMX and the CME itself.

This month, the NYSE agreed to buy the American Stock Exchange in the latest example of consolidation.

The CME had widely been expected to target the Nymex. The New York exchange revealed last August that it had held preliminary discussions with both the CME and the NYSE Euronext, although uncertainty over valuations had prevented any agreement at that time.

By moving from informal talks to an exclusive negotiation period with the Nymex the CME has not only got the better of a potential competitor, for the time being, it has also moved closer to a deal that is widely thought to make good business sense for both exchanges.

First, the two exchanges have established a collaborative relationship. Nymex uses the CME’s Globex system for its electronic trading in all futures and options, giving the two a pre-existing built-in integration that had led many observers to conclude that a takeover was likely.

Second, the CME has always made clear it was on the hunt for purchases. As a mature exchange with a strong brand, NYMEX represents a good opportunity. “The CME’s best bet to continue to grow is to acquire entry into pools of liquidity that don’t take time and money to develop,” says John Lothian, editor of The John Lothian Newsletter, a derivatives markets daily briefing.

Nymex gives the CME the opportunity to tap into energy trading, a fast-growing area of the derivatives market, and a share of over-the-counter derivatives trading, something it has long coveted.

Getting into energy enables the CME to square up to the Intercontinental Exchange (ICE), which has built up a strong position in energy and OTC trading. The CME and ICE have a fractious relationship: as the CME was moving ahead with its friendly takeover of the CBOT, ICE upset the cosy cross-town arrangement by making a surprise bid. The CME eventually had to pay a lot more than it had hoped and a fair amount of bad blood was created.

“This looks like a great deal for CME, in that the company would be acquiring one of the two major players in energy at a very reasonable price,” Christopher Allen of Bank of America said in a research note.

The CME’s purchase of Nymex may in turn force ICE to seek the support of a tie-up with a “big brother” exchange if it is not itself to become a target as exchange consolidation proceeds.

For Nymex, which has made it clear that it does not see any future for itself as an independent exchange by touting itself as an acquisition target, a possible purchase by the CME at a 11 per cent premium on the share price is like the arrival of the cavalry at the eleventh hour.

“The Nymex rank-and-file were getting frustrated that nothing was happening,” says one person close to the exchange. “They were concerned the CME wouldn’t pay such a high valuation. But with this valuation, everyone is thrilled. This deal is stone-cold locked.”

Perhaps the only thing that might unlock it is regulatory intervention. The Department of Justice scrutinised the CME’s takeover of the CBOT after many in the industry raised antitrust concerns, arguing that the purchase gave the CME a near-monopoly in US futures. However, the DoJ ultimately approved the deal, saying neither the deal nor an existing clearing joint venture was likely to “reduce competition substantially” or impact innovation or barriers to entry.