The Montreal ex-change’s new partnership with the New York Mercantile Exchange strikes a blow to TSX Group Inc.’s long-held ambition of taking over the ME.
Nymex, the world’s leading energy market, has agreed to pay $88 a share to buy a 10% stake in the ME before it goes public in late March or early April. The two exchanges have also agreed to launch a joint venture in Calgary to trade and clear futures and options contracts in crude oil, natural gas and electricity.
Executives of the two exchanges declined during a conference call to say how much money the ME will earn on Nymex’s equity investment, but the ME’s current share count suggests Nymex is paying about $90 million, putting the value of the entire ME at just above $900 million.
“It’s safe to say that at the close of the first day of trading, it will be above $88 — probably well above $88,” says Dundee Securities Corp. analyst John Aiken, who earlier predicted the ME could be worth $1 billion as a public company.
ME chief executive Luc Bertrand calls Nymex “the ultimate partner” for the ME’s move into energy products. He adds that there is a lot of demand in the booming Canadian oilpatch for derivative instruments used by companies to hedge energy prices and manage other risks.
The joint venture with Nymex will first clear over-the-counter, or custom-made, derivative products and then move into trading exchange-listed products.
“The cost will be minimal, the profits will be swift,” Nymex chairman Richard Schaeffer says of the Calgary-based operation, which is to be up and running by spring.
The new joint venture will compete with the Natural Gas Exchange, a derivatives operation purchased by the TSX in 2004. Energy trading revenue represented 13% of the TSX’s total revenue last year.
Analysts say the partnership between the ME and Nymex makes it unlikely the TSX will succeed in taking over or merging with its smaller Montreal rival.
“The ME wouldn’t have done this if it wanted a deal with the TSX,” says CIBC World Markets Inc. analyst Stephen Boland.
Adds Aiken: “We believe that the ME is once again demonstrating its unwillingness to discuss a partnership with TSX Group, and this increases the likelihood of Canada having two derivatives exchanges in March of 2009.”
The TSX has an agreement with the ME not to compete in derivatives markets before 2009. The commitment was part of a 1999 deal that saw the ME give up its stock listings in return for becoming Canada’s sole derivatives exchange.
Still, the TSX remains anxious to get into the derivatives business. In January, the TSX said it will either acquire an existing derivatives market or form an alliance with one when the non-compete agreement ends.
Bertrand has been cold to suggestions from TSX CEO Richard Nesbitt that the best solution would be for the two exchanges to join forces. During the conference call to announce the Nymex partnership, Bertrand indicated the ME is ready to compete aggressively when the Toronto exchange finally enters the derivatives field.
“We’ll just work like buggers to keep our predominance of the derivatives business in Canada,” he said, when asked about the possibility of two derivatives operations in the small Canadian market.
Shares in derivatives exchanges are a hot commodity amid rapid consolidation in the industry. Nymex’s initial public offering in November saw its IPO shares, priced at US$59 each, finish their first day of trading at US$132.99.
In private transactions as late as December, ME shares were trading at $60 apiece, up from $17 in June 2005.
The ME is currently privately owned by 307 shareholders, including brokerages, banks, investment firms and individuals. The three largest shareholders, with almost 10% each, are National Bank of Canada, Swiss bank UBS and the giant pension fund Caisse de dépôt et placement du Québec. Exchange employees own about 14% of the shares.
Schaeffer, who will join the ME’s board as part of the deal, would not comment on whether Nymex would be interested in buying a bigger piece of the ME if it could. He did, however, say Nymex wants the partnership to grow.
Under the bylaws of the ME, no single shareholder can own more than 10% of the shares. Any change in the rule would require the approval of Quebec’s securities regulator, effectively giving the Quebec government a veto over any takeover of the ME.
@page_break@The ME has set the stage for its public listing by posting stellar results for 2006. Net earnings jumped 64% to $24.8 million, while revenue grew 25% to $79.3 million. Trading volume climbed 41%.
Meanwhile, the ME is awaiting regulatory approval to increase its stake in the Boston Options Exchange to 45% from the current 31%. Things also look good for its partnership with the Chicago Climate Exchange to launch a carbon-trading market in Canada; the federal Conservatives have been making encouraging noises about introducing a mandatory cap-and-trade system to limit greenhouse gas emissions. And the ME is trying to market its high-speed Sola trading platform to other exchanges. IE
Montreal Exchange deal shuts out TSX
“Cost minimal, profits swift” as ME and Nymex announce Calgary-based derivatives exchange
- By: Don Macdonald
- March 5, 2007 March 5, 2007
- 11:15