CHICAGO (AFX) - The planned tie-up between CBOT Holdings Inc. and Chicago Mercantile Exchange Holdings Inc. adds another layer of uncertainty for CBOT members regarding the status of their exercise rights at the Chicago Board Options Exchange.
The exercise rights held by full CBOT members allow them to trade at the CBOE and to receive CBOE stock and dividends -- benefits that could pay off handsomely as the nation's largest options exchange carries out its transition to a shareholder-owned company.
Officially, there's no change yet: CBOT Chairman Charles Carey said during a conference call Tuesday to discuss CME's $8 billion acquisition of CBOT that the deal doesn't change the CBOE trading rights issue. He noted that CBOT has attempted to 'preserve' the trading rights.
CBOE said in a letter issued to members Tuesday that it 'was not asked to express any view about whether or how this transaction might affect the Exercise Right.' The CBOE also said this transaction is not expected to have any effect on CBOE's decision to demutualize.
In a filing Wednesday with the Securities and Exchange Commission, CME and CBOT said that the merged company 'shall use commercially reasonable efforts to preserve the Exercise Right for the benefit' of CBOT members. Support for the effort to preserve the exercise rights will be provided so long as CME Group Inc., as the new company will be known, isn't 'required to spend in the aggregate in excess of ($15 million),' the companies said.
But the uncertainty surrounding the trading rights issue underscores the challenges facing the Chicago exchanges as they shed their member-owned pasts and take steps to enhance their positions in an increasingly competitive global environment for exchanges.
On Thursday, the one-year anniversary of CBOT's initial public offering, the second of three lockup periods for CBOT members to sell shares ends.
A total of 16.4 million CBOT shares are eligible for sale Thursday as a result of the expiration. CBOT members are required to hold a certain number of shares to maintain their exercise right at CBOE.
Despite the continued uncertainty about the status of the CBOE exercise rights, equity analysts expect that most members who are eligible to sell will be holding onto the shares, betting that the potential CBOE-related windfall outweighs the value of selling their holdings now.
As an indication of the potential value embedded in CBOE's reorganization, a membership seat at the options exchange sold for a record high of $1.505 million on Wednesday, after several seats sold for $1.5 million the day before. Seat prices are up about 70 percent since the start of the year.
'If you're sitting on that trading right, there is no way you would sell the stock,' said Ryan Caldwell, stock analyst at Waddell & Reed.
Caldwell said the acquisition by CME doesn't change Thursday's scenario, because CBOT members still want to profit from CBOE's demutualization. Caldwell, whose firm owns shares in both CME and CBOT, said he heard an overwhelmingly positive response from CBOT members about the acquisition.
Caldwell acknowledged that some CBOT members may be tempted to sell their shares now because of the gains seen since CBOT went public at $54 a share. CBOT shares fell 2 percent on Wednesday to close at $148.95, after hitting a record high of $159.49 during Tuesday's session.
Caldwell says CBOT members would be better off swapping their holdings for CME stock -- under the deal announced Tuesday, CME is offering to swap 0.3006 shares of its stock for each share of CBOT -- because it will still allow them to participate in how value is allocated through the CBOE rights issue. CBOT shareholders could also take cash under the CME deal, though the total payout will be limited to $3 billion.
The CBOE exercise-rights issue kept many CBOT members from selling shares at the end of the first lockup period in April. A final lockup period ending next April will make another 16.4 million shares available for sale.
'With the first lockup, there was really no interest in selling because of the ambiguity over the value of the CBOE exercise right,' said analyst Mark Lane at Chicago-based William Blair & Co. 'That issue still exists. It mitigates the risk from a lot of stock coming out on the open market.'
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© 2006 AFX News
