CME Group Inc, the world's largest futures exchange operator, will buy derivatives broker GFI Group Inc to expand its reach in the European energy and global foreign exchange markets, CME said on Wednesday.
CME, owner of the Chicago Board of Trade and Chicago Mercantile Exchange, said it would acquire GFI in an all-stock deal worth $580 million and assume $240 million in outstanding debt, for a total value of around $820 million.
Chicago-based CME will then spin off GFI's wholesale brokerage business to a private consortium controlled by GFI management for $165 million in cash, and the assumption of around $63 million of unvested deferred compensation and other liabilities, the companies said.
When all is said and done, CME will pay around $655 million for two GFI units, called Trayport and FENICS, not including certain tax benefits.
CME shares were down 0.3 percent at $75.29. GFI shares were up 43.4 percent at $4.46.
For CME, “it's a nice strategic acquisition but it's small,” said Richard Repetto, principal for Sandler O'Neill.
CME does not “have real penetration over in Europe in energy,” he added. “That's what this Trayport platform is all about.”
Trayport provides brokers, exchanges and traders with software, network, and hosting services that touch an estimated 85 percent of all European wholesale power and gas transactions, said Martin Fraenkel, CME's managing director of international energy.
Trayport will operate independently from CME, he said in an interview. Most of Trayport's business is not cleared on exchanges, he added, noting that new regulations are expected to push more transactions on to exchanges.
CME's global energy complex trades 1.7 million contracts a day and includes 500,000 contracts per day in Henry Hub, the U.S. benchmark contract for natural gas.
“CME is completely committed to maintaining and growing Trayport as a multi-exchange venue for users of the platform,” Fraenkel said. “That's what clients want and that's what we will help to grow.”
FENICS provides price discovery, analytics, risk management and connectivity services for the global over-the-counter foreign exchange (FX) options markets.
CME, which in April launched FX futures and options on its first overseas exchange, CME Europe, said FENICS' client base, particularly in Asia, would complement CME's FX product distribution.
FENICS will continue to serve as the sales agent for GFI Group's wholesale broker market data, the companies said.
CME will pay $4.55 per share in CME Class A common stock for each GFI share, representing a 46 percent premium to GFI's closing price on Tuesday. The deal is expected to qualify as tax-free exchanges of equity for both parties.
CME, which is set to report second quarter earnings on Thursday, will spin off GFI's brokerage business because the exchange operator “does not have a strategy of acquiring broker dealers,” Fraenkel said.The transaction needs approvals from GFI Group stockholders and by regulators. It is expected to close in early 2015.