Now that the CME Group and Nymex officials have a definitive merger agreement, the CME Group removed two impediments to the deal by selling the CBOT metals complex to NYSE Euronext for an undisclosed sum on March 14.
“We had a decision to make with the metals regardless of coming up with a definitive agreement with Nymex,” says Terry Duffy, CME Group executive chairman. “Now for sure we don’t have any over-lapping business with the Nymex.” Senator Charles Schumer (D-NY) suggested that the sale would pave the way for Department of Justice approval of the CME/Nymex deal.
The harder part of shepherding the deal may have fallen to Nymex management, who will need to sell the deal to shareholders and members. In March we reported that Richard Schaeffer’s bonus was increased to $3.6 million, and that President James Newsome’s bonus was increased to $2.6 million, and that a 3X multiplier would be applied in the case of a change in control of the company. A fuller picture emerged in the April 7 definitive proxy statement, in which Newsome’s total compensation in a change of control situation could be $25 million, including $9.2 million in non-qualified stock options (NSO) and restricted stock units (RSU) plus $5.14 million for his tax obligations. Schaeffer would receive a total of $32.67 million, including $9.2 million in non-qualified stock options (NSO) and restricted stock units (RSU) and $7.28 million for his tax obligations. CIO Samuel Gaer could receive $6.9 million, and CFO Kenneth Schiffrin could receive $5.44 million, and general counsel Christopher Bowen could receive $4.95 million under similar deals.
Perhaps unsurprisingly, some Nymex shareholders, already unhappy with the CME Group’s offer, have a problem with that. Mark Rifkin, attorney for the law firm Wolf Haldenstein Adler Freeman & Herz, represents Nymex member and shareholder Cataldo Capozza who has filed a class action lawsuit alleging that the definitive agreement with the CME Group shortchanges Nymex shareholders and accuses Nymex management of self dealing and breaching their fiduciary responsibility.
Capozza believes the initial offer, equal to $119 per share, was inadequate, Rifkin explains, as the stock had traded higher shortly before the deal was announced. In addition, because the deal was based on a 70% stock and 30% cash basis, and because it was structured without a collar on the value of CME Group stock, the deal has since declined substantially in value. “The Nymex shareholders were completely subject to fluctuations in the price of CME stock… So, what was a bad deal to start off with has become an even worse deal,” Rifkin says. At press time, CME stock was trading at $499 per share; Nymex stock was $95.57.
Another group of Nymex members has successfully petitioned a meeting to review Nymex bylaw 311 G, which says that any floor traded contract that is terminated and available only via computer, or where 90% of the volume is via computer, that Nymex members will receive 10% of the revenues or 100% of special fees.
“That’s really the value in the seat. The value in the seat is not being able to have access to the trading floor anymore, because there is no derivative value,” says Nymex member Eric Bolling.
“I don’t believe that’s going to hold this up,” says John Vassallo, president of Coquest Inc. and a Nymex member. He says that if you compare the equity and trading rights that Nymex members received through the demutualization and initial public offering, the trading right is worth about $600,000, and if members haven’t sold, their equity is worth about $9 million. “So the $600,000 is not going to hold up the $9 million,” he says. Despite member protestations, the CME offer is still at a premium to Nymex stock and without a higher competing bid, there is not much chance it will change.
The deal also would be subject to regulatory approval, including the CFTC and the U.S. Department of Justice (DoJ), which approved the CME/CBOT merger, but also recently made known its objections to vertically integrated clearing of financial futures. In that same comment letter to the Treasury, DoJ also said energy markets should be exempt from such changes.