Nasdaq, ICE Top Deutsche Boerse With $11.3 Billion NYSE Bid

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE) made a hostile bid of about $11.3 billion for NYSE Euronext, trying to snatch the owner of the New York Stock Exchange away from Deutsche Boerse AG.  As part of the deal, ICE would purchase NYSE Euronext's Liffe futures markets, while Nasdaq OMX would take over its U.S. options markets. The offer represents a 19% premium over a February bid for NYSE Euronext by the German exchange.

Nasdaq OMX and ICE offered $42.50 in cash and stock for each NYSE Euronext share, according to a statement released today. The shares closed at $35.17 yesterday. Deutsche Boerse’s February all-stock agreement to purchase NYSE Euronext values the company at about $35.04 a share.

The union of NYSE Euronext and Nasdaq OMX would join the two largest U.S. exchange operators, giving the combined entity a monopoly for company stock listings in the world’s largest capital market. As part of the deal, ICE would purchase NYSE Euronext’s futures markets, while Nasdaq OMX would keep its U.S. options markets. The Deutsche Boerse deal, valued at $9.53 billion when announced in February, creates the world’s largest exchange operator with venues in the U.S. and Europe.

“The $42.50 sounds great on paper,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global in New York. “But on a practicality level, as Nasdaq and ICE shares trade today and the next few days, as we’ve seen over the past month or two now of how Deutsche Boerse shares have traded, that will determine if the implied value is $42.50 or much lower.”

Sweden, Denmark, Finland

Nasdaq OMX owns 12 equity and options markets in the U.S. and Europe including the Nasdaq Stock Market, Nasdaq Options Market and venues in Sweden, Denmark, Finland, Iceland, Estonia, Latvia and Lithuania. It produced net income of $395 million in 2010, which is 26 percent of the company’s $1.5 billion in net revenue for the year.

NYSE Euronext’s divisions include the New York Stock Exchange, the Euronext platform that handles shares in the Netherlands, Belgium, Portugal and France, and the European derivatives platform known as NYSE Liffe. Income amounted to 22 percent of its $2.5 billion in net revenue.

The Deutsche Boerse deal, valued at $9.26 billion as of yesterday, creates the world’s largest exchange operator. It carries a 250 million ($356 million) breakup fee, increasing the cost of Nasdaq OMX and ICE’s bid by about $1.35 a share, said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global in New York.

Half of Trading

Combined, NYSE Euronext and Nasdaq OMX would have about 48 percent of U.S. equity trading. They have struggled to keep market share since Kansas City, Missouri-based Bats Global Markets and Jersey City, New Jersey-based Direct Edge Holdings LLC started their own venues about five years ago. NYSE Euronext currently handles 28 percent of equity volume and Nasdaq OMX has 20 percent, according to data from London-based Barclays Plc for the fourth quarter.

In Focus: Cotton

On May 11, the U.S. Department of Agriculture forecast global cotton consumption of 115.9 million bales for the 2009/2010 season ending July 31, 2010. While this level of consumption is considerably lower than the 2006/2007 record of 123.6 million bales, it represents an increase from 2008/2009, when consumption fell more than 10% to 109.7 million bales as a result of the global economic crisis.

China is the world’s leading importer and consumer of cotton, accounting for more than 40% of global cotton consumption in 2009/2010 and more than half of the increase in global consumption from 2008/2009. India and Pakistan rank second and third, respectively, together accounting for more than 25% of total cotton consumption. The U.S., by comparison, is expected to account for just 3% of global cotton consumption in 2009/2010 and less than half its 7.5% share in 2002/2003.

The United States is the world’s third largest producer of cotton (behind China and India) and its largest cotton exporter. The USDA’s May report estimated the 2009/2010 U.S. cotton crop at 12.2 million bales. With exports of 12 million bales in 2009/2010, the USDA forecasts U.S. share of the global cotton trade at 35% this year, compared to 44% in 2008/2009 (when global exports/imports were lower) and in-line with 2006/2007 and 2007/2008.

For 2010/2011, the USDA estimates that U.S. cotton acreage will increase for the first time in three seasons, with harvest acreage increasing 15% from the current year and production and export forecasts to be 16.7 and 13.5 million bales, respectively. U.S. ending stocks are forecast to be 3 million bales in 2010/2011, the lowest level since 1995/1996. Global consumption is estimated to be 119.1 million bales, with exports/imports of 35.7 million bales. Global ending stocks are forecast to decline to 50.1 million bales, as consumption exceeds production for the fifth consecutive year — which is rare, as a five year streak of consumption exceeding production has not occurred for 50 years.

Cotton futures began trading on the New York Cotton Exchange in 1870. Options on cotton futures were introduced in 1984. Today, ICE Futures U.S. is the exclusive global market for Cotton No. 2, the benchmark contract for pricing and risk management by U.S. and international cotton commercial sector.

On April 26, futures prices on Cotton No. 2 reached a two-year high, with the May and July contracts reaching 85.10 and 87.10 cents per pound, respectively, before closing at 84.02 and 85.89 cents per pound. Average daily volume in Cotton No. 2 has increased more than 40% from a year ago, and open interest in up more than 30% as of May 11.

Because global textile production is now heavily concentrated in Asia, Cotton No. 2 offers exposure to China and other textile manufacturing centers that import U.S. cotton. Cotton may also offer exposure to/correlations with the U.S. Dollar and competing or complementary agricultural commodities, such as soybeans. As China and other emerging economies continue to accelerate and as global cotton consumption continues to outpace production, Cotton No. 2 will remain an important indicator of the global economic activity. Contract specifications for Cotton No. 2 and more information are available on ICE's Cotton homepage.

CBOE competitor wants $300M in patent dispute

(Crain's) — A Chicago Board Options Exchange rival claims the exchange owes it $300 million in patent infringement damages.

New York-based International Securities Exchange LLC, which has been embroiled in a patent dispute with CBOE for years, filed its claim May 7 in U.S. District Court in Chicago.

The ISE’s claim for monetary damages came in response to a request that CBOE made for a summary judgment instead of a jury trial in a patent dispute case filed in 2007.

CBOE in 2007 asked a federal court to rule that its trading technology does not infringe on patents held by ISE. Both sides have continued to battle the issue in court, with CBOE recently calling for a judge to deliver a ruling.

The CBOE is on the verge of an initial public offering of at least $292 million. Its members are scheduled to vote Friday on a demutualization plan that would allow it to go public.

A CBOE spokeswoman declined to comment on the ISE's $300-millioin damages claim, citing a quiet period before an IPO, according to a Dow Jones Newswires report.

But in a notice that CBOE sent to member-owners, exchange officials said they were "confident" that their position in the patent dispute was "well-founded," Dow Jones reported.

An ISE spokeswoman told Dow Jones that the company is "highly confident in the merits of this case and believe that our legal filing speaks for itself."

IntercontinentalExchange Announces Acquisition of Climate Exchange

ATLANTA and LONDON, April 30, 2010 /PRNewswire via COMTEX News Network/ -- IntercontinentalExchange (NYSE: ICE), a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets, today announced that it has agreed on terms to acquire Climate Exchange plc (Climate Exchange or CLE), a leader in the development of traded emissions markets. Climate Exchange operates the European Climate Exchange (ECX), the Chicago Climate Exchange (CCX) and the Chicago Climate Futures Exchange (CCFE).

Under the terms of the acquisition, Climate Exchange shareholders will receive 7.50 pounds Sterling in cash for each share in Climate Exchange held at today's date, valuing the entire existing issued and to be issued share capital of Climate Exchange at approximately 395 million pounds ($604 million(1)). The transaction consideration will include $220 million that has been drawn from ICE's existing credit facilities for these purposes(2) and the remainder from existing cash resources. The transaction is expected to be accretive to earnings in 2011 and slightly dilutive to earnings for the balance of the current year(3) following an anticipated closing at the end of July 2010. ICE, through its wholly-owned subsidiary IntercontinentalExchange Holdings, acquired a 4.8% stake in CLE on June 22, 2009 for 6.45 pounds a share. Additional details will be provided upon the completion of the transaction, at which time Climate Exchange will be a wholly-owned subsidiary of ICE, operating under the Climate Exchange's respective brand names.

"The combination of Climate Exchange's emissions markets and ICE's futures and OTC energy markets is an important and logical strategic combination for our customers and shareholders, and clearly an exciting opportunity for ICE to grow and further diversify our revenues," said ICE Chairman and CEO Jeffrey C. Sprecher. "ICE has been a partner with Climate Exchange and Dr. Sandor since 2003, and we have worked together toward the development and expansion of the emissions markets. The leadership that Climate Exchange has shown in establishing market standards in Europe, and increasingly the U.S. and Asia, has driven its success, and we see continued growth opportunities within these nascent markets globally."

"The development of our Company from initial concept to its leadership role in global environmental markets is a tribute to the vision and efforts of our entire team. We believe that a combination with ICE makes strategic sense and look forward to addressing continued opportunities together," said Climate Exchange's Chairman Richard Sandor. "ICE has committed to further developing the Climate Exchange businesses and building on our joint track record of innovation and success to the benefit of our customers across futures and OTC markets in Europe, Asia and the U.S."

ICE and its affiliates currently have multiple contracts in place with Climate Exchange and its affiliates to provide technology and clearing services. These contracts include a cooperation and licensing agreement whereby ICE provides an electronic trading platform and clearing to ECX for European emissions trading, a licensing technology agreement whereby ICE provides an electronic trading platform to CCX for U.S. emissions trading and a clearing services agreement whereby ICE provides clearing for CCX's U.S. emissions markets. Pursuant to these contracts, ICE charges fees to Climate Exchange for the services provided and shares in the revenue with respect to the trading and clearing of emissions contracts.

The transaction is subject to relevant regulatory approvals. Morgan Stanley advised ICE on the transaction and Shearman & Sterling LLP served as ICE's legal advisor.

(1) Based on an USD/GBP exchange rate of 1.528

(2) A detailed description of these credit facilities can be found in Form 8-K as filed with the U.S. Securities and Exchange Commission on April 2, 2010.

(3) Nothing in this announcement is intended to be a profit forecast and the statements in this announcement should not be interpreted to mean that the earnings per share of IntercontinentalExchange common stock for the current or future financial periods will necessarily be greater or lower than those for the relevant preceding financial period.

About IntercontinentalExchange

IntercontinentalExchange^® (NYSE: ICE) is a leading operator of regulated futures exchanges and over-the-counter markets for agricultural, credit, currency, emissions, energy and equity index contracts. ICE Futures Europe^® hosts trade in half of the world's crude and refined oil futures. ICE Futures U.S.^® and ICE Futures Canada^® list agricultural, currencies and Russell Index markets. ICE^® is also a leading operator of central clearing services for the futures and over-the-counter markets, with five regulated clearing houses across North America and Europe. ICE serves customers in more than 55 countries. www.theice.com

ICE Introduces Russell 1000 Growth and Value Indexes

On May 3, 2010, ICE Futures U.S. will introduce the Russell 1000^® Growth Mini and Russell 1000^® Value Mini Index futures contracts.

As comprehensive and unbiased barometers of the large-capitalization growth and value segments of the U.S. equity universe, the Russell 1000 Growth and Russell 1000 Value Indexes are widely used by fund managers and institutional investors specializing in style investing. Both indexes are comprised entirely of members of the benchmark Russell 1000^® Index, which includes the largest thousand companies by market capitalization and represents approximately 92% of the investable U.S. equity market.

The Russell methodology allows companies with both growth and value characteristics to be included proportionally in a growth-style or value-style index — or both. As of March 2010, there were 621 stocks in the Russell 1000 Growth Index and 674 issues in the Russell 1000 Value Index. 295 stocks were included in both indexes. Proportional representation provides an unbiased and accurate depiction of the market, and allows the Russell 1000 Growth and Russell 1000 Value Indexes to function as a proxy for asset allocation purposes and an efficient vehicle for passive investment strategies.

Introduced in 1984, the Russell 1000 and the small- cap Russell 2000^® were the first float-adjusted equity indexes. Most stock indexes are based on market-capitalization, where the number of shares outstanding are multiplied by the current share price to determine a company's weighting in an index. Float-adjustment refines market capitalization weighting by counting shares available for purchase in public markets, rather than total shares outstanding. Because stocks with higher float and more liquidity are more heavily weighted, float-adjusted equity indexes more accurately reflect the investment opportunity in the market. All Russell indexes are reconstituted annually at the end of June to ensure accurate representation of the investable equity marketplace and to avoid style slippage. The 2010 reconstitution of the Russell Indexes will take place after the market closes on June 25, 2010.

Because of Russell Investments' leadership in developing style indexes that reflect relevant market segments, more than 97% of institutional U.S. style assets that use a benchmark are benchmarked to Russell products. Futures and options on futures based on Russell Investment’s industry-leading U.S. equity indexes, including the Russell 1000 and Russell 2000^® Indexes, have traded exclusively on ICE Futures U.S. since September 2008.

Information about Russell indexes, including construction methodologies and the top ten equities by capitalization in the Russell style indexes, is available at the Russell website. Contract specifications and an FAQ about the Russell 1000 Growth and Russell 1000 Value Index futures contracts are available on the ICE Russell Index homepage.

ICE to buy parent of Chicago Climate Exchange

(Reuters) — Futures exchange group Intercontinental Exchange Inc. said it agreed to buy Climate Exchange for 395 million pounds ($606.7 million) to create a single trading platform for environmental contracts worldwide.

Shareholders in Climate Exchange, the operator of the European, Chicago and Chicago Futures carbon emissions exchanges, will receive 750 pence a share in cash, representing a 57 percent premium on Thursday's closing price, ICE said in a statement on Friday.

Climate Exchange was founded by Richard Sandor, a longtime futures industry executive in Chicago.

ICE, which already provides technology and clearing services to Climate Exchange, said it would combine the British company's emissions markets with its own futures and energy markets.

ICE Chairman and CEO Jeffrey C. Sprecher said, "The leadership that Climate Exchange has shown in establishing market standards in Europe, and increasingly the U.S. and Asia, has driven its success, and we see continued growth opportunities within these nascent markets globally."

Atlanta-based ICE said the deal would slightly reduce earnings for the remainder of 2010, but would add to earnings from 2011.

"Carbon has become a vital part of the energy market (and) this is a commitment from one of the world's biggest exchanges to this market, so it's good news for the environmental markets and for our clients," said Climate Exchange CEO Neil Eckert, adding that it was unclear whether he would stay on as chief of the world's biggest emissions exchange operator.

Climate Exchange dominates exchange trading in European Union carbon permits, a market worth some $100 billion in 2009.

The company also has interests in burgeoning emissions exchanges in China, Canada and Australia.

KBC Peel Hunt says ICE has timed its bid well and that the 750-pence-per-share offer is not generous given that it is close to KBC's fair value for Climate Exchange, which did not include a bid premium.

"A counter-bidder could have paid more but has been squeezed out. There is no real alternative but to accept the offer," analyst Andrew Shepherd-Barron says.

New clearing venture gets big backers, big foes

CME Group Inc. and Citadel Investment Group have signed five prominent money managers to their fledgling credit-swap default joint venture.

But the launch of the business — targeting a $29-trillion market — is being thwarted by an “oligopoly” of banks that want to keep business at a rival clearinghouse in which they have an economic interest, according to a letter from one of the founding hedge funds, New York-based BlueMountain Capital Management LLC.

CME’s joint venture, CMDX, has been in the works for more than a year, but its ambitions to be a clearing destination for the insurance-like derivatives known as credit-default swaps have so far gone unfulfilled. CMDX’s main rival, IntercontinentalExchange Inc.’s ICE Trust clearinghouse, opened for business in March and has so far guaranteed $710 billion in credit-default swaps. ICE Trust is backed by a dozen or so Wall Street firms, including Morgan Stanley and Goldman Sachs Group Inc.

The other funds that have signed on to Chicago-based CMDX include bond-fund manager Pacific Investment Management Co. and hedge funds BlackRock Inc., D. E. Shaw & Co. and AllianceBernstein Holding LP.

The letter, from BlueMountain Chief Operating Officer Samuel Cole, was written after an International Swaps and Derivatives Assn. conference call May 29 among banks and hedge funds to discuss regulation of derivatives trading.

“Dealers are deriving substantially more economic value from their relationship with ICE than the six buy-side firms are from their relationship with CME,” Mr. Cole said in an e-mail, whose subject line was “a note to dealers” and a copy of which was obtained by Crain’s. “The stunned silence that you heard from buy-side firms on Friday’s call was the disquieting realization that the dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buy side to develop a clearing solution.”

Mr. Cole, through a spokesman, declined to be interviewed. “We continue to work with the buy side and the sell side to promote our solution,” a CME spokesman said. A Morgan Stanley spokeswoman didn’t immediately return a call seeking comment; a Goldman Sachs spokesman didn’t have an immediate comment.

The letter was earlier reported by Bloomberg News.

ICE posts 24% decline in Q4 profit

The InterContinental Exchange said its fourth-quarter profit was hit by a $16 million write-down in its holding in a derivatives exchange in India, NCDEX, and trading cuts by financial institutions. Quarterly net income fell from $65 million in 2007 to $49 million last year. ICE said it planned to reduce its work force as much as 7% by the end of March.

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