It would take just 204 New York Mercantile Exchange (Nymex) members voting ‘no’ to kill the proposed merger with the CME Group, and several recent developments indicate that is increasingly likely. On April 25, a Nymex membership sold for $640,000, above the $612,000 value that Nymex assigns a membership in the context of a merger with the CME; and as Futures heads to press, another seat is bid at $695,000 with an offer of $650,000.
Nymex also decided that bylaw 311(G) entitles Nymex members to 10% of revenues from contracts that trade 90% average-quarterly volume electronically for two consecutive quarters. According to Sandler O’Neill Partners Analyst Richard Repetto, that decision could trigger a $36 million to $42 million payout to the 816 Nymex members in 2009. To date, no Nymex contracts have fulfilled the requirements to trigger the payments, which would be made quarterly and in perpetuity for as long as Nymex lists the contract (see chart).
“If the vote was today, it would be dead on arrival,” says an influential long-term member and large shareholder. “Even if the common stock holders vote for it, the trading right owners could break up the CME deal.” He explains that in the context of a CME/Nymex merger, there are three facets to the value of a Nymex membership: the 311(G) revenue stream, discounted member rates and the opportunity to lease the trading right. At currents volume levels, the 311(G) revenue stream could be worth between $40,000 and $50,000 per year, he says. “You could apply a multiple of 20 and you get a million dollars,” in addition, he says the discounted member fees and leasing rights are worth another $150,000 per year. “That is what the exchange is asking us to liquidate for $612,000?” he asks skeptically.
Eric Bolling, Nymex member and independent trader, supported the deal when it valued Nymex stock at $116 per share in an equity swap. But CME stock is currently trading near $475 per share, and CME narrowly missed analysts’ first quarter expectations. On the other hand, with Nymex trading at $94, experiencing 30% growth and exceeding analyst expectations, Bolling says the CME/Nymex deal is precarious at best. “If the CME came back and said they will pay $116 per share, the deal would fly.” But with Nymex at $94, he says no. “You buy cheap stocks,” he says, “You don’t sell them.”
Another Nymex shareholder and former member says that if members scuttle the deal, it could destroy the exchange, which continues to lose ground against the Intercontinental Exchange (ICE) in terms of stock valuation, trading multiples and market capitalization. The member says of the CME offer, “This has been our last lucky break and when push comes to shove, Nymex members are not going to vote against the deal.”