Oct. 18 (Bloomberg) -- The Chicago Board Options Exchange will probably have to resolve legal challenges to its ownership structure before being sold, analysts said.
CME Group Inc., the world’s largest futures market, is “putting out feelers” about buying CBOE, a takeover that would give it the biggest share of trading in listed U.S. options, Crain’s Chicago said, citing people familiar with the discussions who it didn’t identify. A purchase may depend on CME’s Chicago Board of Trade resolving a lawsuit over how big a claim its members have on CBOE seats, analysts said.
“It’s a bit surprising to me because the ownership is still unclear,” said Richard Repetto, an analyst with Sandler O’Neill & Partners LP in New York. “It’s like buying a house where there’s still some minor repairs.”
Options trading is heading for a record year and has more than quadrupled since 2002 as investors seek to hedge equity holdings and amplify returns. CME cemented its hold on futures in the past three years with the purchase of CBOT and the New York Mercantile Exchange.
Allan Schoenberg, a spokesman for Chicago-based CME, said the company doesn’t discuss speculation. Carol Kennedy, a spokeswoman for CBOE, declined to comment. There is no formal bid, and negotiations are on hold until after Oct. 21, the deadline for filing appeals in the lawsuit, Crain’s said.
CBOE handled 31.4 percent of the equity and index option orders on all seven U.S. exchanges last month, followed by International Securities Exchange with 24.9 percent, according to Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts. ISE of New York is owned by Frankfurt-based Eurex AG, Europe’s largest futures exchange.
Index Options
Excluding options linked to indexes, ISE was the largest U.S. equity derivatives market in September, with 29.1 percent of the business in contracts tied to stocks and exchange-traded funds. CBOE, which had 28.7 percent, gets a boost in the total options market because of exclusive listings for contracts tied to the Standard & Poor’s 500 Index and the VIX, as the CBOE Volatility Index is known.
S&P 500 options are the fourth most-traded in the U.S., accounting for 4.2 percent of transactions during the first nine months of this year, according to OCC data.
An acquisition would value CBOE at as much as $5 billion, Crain’s reported. A bid may value each CBOE seat at about $4 million, a 50 percent premium, according to Crain’s.
The CBOE reached agreement on membership eligibility on Aug. 20 with CME’s CBOT that prevents further legal claims after the derivatives market becomes a public company.
$300 Million in Cash
Once shareholders and the Delaware Chancery Court approve the agreement, no one else will be eligible for membership and lawsuits will be dropped, CME said in a statement. Former members of the CBOT are to receive $300 million in cash and an 18 percent stake under terms announced June 2.
A group of former CBOT members sued CBOE in 2006, claiming they’re entitled to swap CBOE trading rights that date to 1973 into shares of the options exchange. The CBOE claimed CBOT’s sale in 2007 eliminated the members’ ownership claims.
CBOE Chairman Bill Brodsky said last month that the firm expects to demutualize, or exchange stock for its members’ ownership interests, by the end of the first quarter after settling the CME lawsuit.
CME’s net income rose 8.7 percent in 2008, down from growth between 25 percent and 80 percent during the prior six years, Bloomberg data show. Analysts estimate a 22 percent increase to $867 million this year, according to the average forecast in a Bloomberg survey. Its shares have gained 50 percent in 2009.
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