In an attempt to ease fissures in the GFI Group Inc. (GFIG) deal and steer it to culmination, CME Group Inc. (CME) has raised the bar with an offer to pay $5.25 per share, about 15% higher than the previous value.
On Jul 30, 2014, CME Group had inked a deal with the fifth-largest global interdealer broker – GFI Group – to acquire the latter’s European energy (Trayport) and global foreign exchange software (FENICS) businesses. Previously, the buy-out of all the outstanding shares of GFI Group was valued at $4.55 per share, at 46% premium to the latter’s price of $3.11 on Jul 29. However, the hiked price of $5.25 a share is pegged at about 69% premium on $3.11 share price and 5% premium from yesterday’s closing price of $5.00 per GFI Group share.
The hiked price is also in line with the inter-dealer broker – BGC Partner Inc.’s (BGCP) competing offer, which had kept CME Group’s deal agreement in a limbo so far. Last month, BGC Partner also extended its offer till Dec 9, despite the unanimous rejection by GFI Group. This, along with the discontent of GFI shareholders with the previous offer, also explains the current rise in CME Group’s price tag. BGC Partners holds about 13% in GFI Group.
Details of Revised Pact
Per the deal, CME Group will buy the remaining 86.5% of GFI Group outstanding shares that it for a stock-and-cash deal. For each GFI Group share, CME Group will pay an amount equivalent to a 10-day average theclosing price of the latter's shares just prior to the culmination date. The shareholders of GFI Group will have a choice to receive the calculated amount in either cash or stock of CME Group.
Following the GFI Group acquisition, CME Group will sell the former’s wholesale brokerage and clearing business to a private consortium (formed by the GFI Group management) for about $254 million, up from the previously decided $165 million. Additionally, CME Group may incur about $72 million attributable to unvested deferred compensation and other liabilities. Overall, the $89 million increase here accounts for the hike of 70 cents to $5.25 per share, and constitutes 13% of the total value. This will also be the maximum cash outlay in the merger.
Hence, the net payout of the transaction from CME Group would be about $655 million, and assuming a debt of $240 million, the total deal value amounts to $895 million, unaltered from the previous agreement.
Nonetheless, the wholesale brokerage business of GFI Group will continue to maintain long-term business treaties with both Trayport and FENICS. These further include a conditional data license pact that warrants minimum revenue of $15 million from FENICS trading data sales. Pending regulatory and shareholder approvals, the deal is expected to culminate by early 2015.
Lustre in the Acquisition?
While about 85% of the European energy markets trade on Trayport platform, FENICS’ strong clientele in Asia will support effective foreign exchange product distribution. Hence, the deal will boost CME Group’s London and European operations and its competitiveness in the regions, where its arch rivals like Intercontinental Exchange Inc. (ICE) are already fortifying roots.
On the financial front too, CME Group’s financial leverage or debt-to-EBITDA of about 1.0x is hardly expected to change with the GFI deal. Moreover, with cash and marketable securities of $1.16 billion and lack of share repurchases at Sep 2014-end, the company is adequately liquid to fund the transaction. Overall, the purchase appears strategically fit to enhance CME Group’s long-term growth prospects.
Zacks Rank
Currently, CME Group carries a Zacks Rank #2 (Buy).
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