International derivatives marketplace CME Group and OTC electronic trading technology and support firm GFI Group Inc have today announced that they have entered into definitive agreements to create value for their respective stockholders through a two-step transaction through which CME Group will acquire Trayport and FENICS.
CME Group will purchase these businesses by first acquiring all of the outstanding shares of GFI Group in exchange for $4.55 per share in CME Group Class A Common Stock which represents a 46% premium above yesterday’s closing price of $3.11 per share of GFI Group common stock.
Immediately following the acquisition of GFI Group, a private consortium of GFI Group management, led by current Executive Chairman Michael Gooch, CEO Colin Heffron and Managing Director Nick Brown, will acquire GFI Group’s wholesale brokerage and clearing businesses for $165M in cash and the assumption, at closing, of approximately $63M of unvested deferred compensation and other liabilities. After completion of the transaction, the wholesale brokerage business, including the Kyte Group, will continue as a private company with its management and operations largely unchanged. The continuing GFI Group brokerage business will maintain its commitment to both Trayport and FENICS by entering into long-term commercial agreements.
This two-step transaction, which has been approved by the Board of Directors of GFI Group upon the unanimous recommendation of a Special Committee comprised solely of independent and disinterested directors, and by the Board of Directors of CME Group, is expected to create significant stockholder value for both GFI Group and CME Group stockholders and to qualify as tax-free exchanges of equity for both groups. The transaction is subject to the approval of the stockholders of GFI Group as well as customary regulatory review and approvals. It is expected that the transaction will close in early 2015.
“European energy markets are de-regulating, and the regional demand for risk management in the sector is very high and growing,” said CME Group Executive Chairman and President Terry Duffy. “By acquiring Trayport, a well-established business that already has a strong client base, we will both expand CME Group’s involvement with European energy markets and increase operational efficiencies and trading opportunities for all European energy market participants – all while maintaining the independence of the Trayport operating platform. This acquisition is another strong example of how CME Group is expanding its international footprint and committed to the European marketplace overall.”
GFI Group Executive Chairman, Michael Gooch, commented: “We are very pleased to announce this transaction with CME Group and the substantial premium and liquidity it delivers to our stockholders. Optimizing GFI’s value for stockholders has been a goal of management since becoming a public company in 2005 and this transaction represents a singular and unique opportunity to return value. I am very proud of what our Trayport and FENICS teams have achieved since becoming a part of GFI. We are excited that these businesses will become part of a dynamic and highly-regarded company where their immediate strategic value can be further realized within CME.”
“While Trayport brokers and clients will continue to connect to clearing and execution services on multiple exchanges as they always have, CME Group also will be working to improve upon workflows and straight-through-processing that ultimately will benefit end users in the European energy markets,” said CME Group CEO Phupinder Gill. “Overall, we see a number of opportunities with Trayport as we expand our global footprint, including facilitating and servicing Asian energy markets as they emerge. The addition of FENICS will allow our FX futures and options business to more effectively and efficiently integrate and connect with the global OTC FX options marketplace.”
Colin Heffron, CEO of GFI Group, noted: “Over the past few years, the wholesale brokerage industry has faced challenging market conditions along with increased regulatory requirements. Even with those challenges, we continued to invest in technology to better serve our clients and further increase overall market efficiency. This transaction unlocks the substantial value of our Trayport and FENICS technology businesses in a tax efficient manner. Additionally, it will allow our wholesale brokerage and Kyte businesses to continue as a private company, giving them the added flexibility and agility needed to capture future market opportunities. The talents and commitment of our team have made the GFI wholesale brokerage and clearing businesses recognized leaders in their industry. I am proud and excited to continue to work together with them in this next phase of our development.”
Strategic Rationale for CME Group
The acquisition of Trayport, a leading provider of trading software in the European energy markets, which will operate under current management as a wholly-owned subsidiary, marks a further extension into the European energy markets for CME Group. Trayport is used by brokers, exchanges and trading counterparties, and a significant share of European natural gas, power and coal trading activity takes place using Trayport software, network and hosting services.
Trayport expands CME Group’s existing global energy complex, which trades 1.7 million contracts a day and includes 500,000 contracts per day in Henry Hub, the US benchmark contract for natural gas. This acquisition adds European distribution to build on CME Group’s natural gas portfolio of deeply-liquid physically and financially settled futures and options contracts, growing North American basis markets and upcoming European Natural Gas Futures contracts.
The acquisition of FENICS, which also will operate under current management as a wholly-owned subsidiary, provides best-in-class price discovery, analytics, risk management and workflow connectivity services for the global OTC FX options markets. As a result, this acquisition continues CME Group’s European infrastructure investment following the launch of FX futures and options on CME Europe in April 2014. FENICS’ strong client base, particularly in Asia, will further complement CME Group’s FX product distribution.
The acquisition brings together FENICS’ OTC FX options analytics and pricing suite with a leading regulated FX futures and options marketplace with 2013 average daily volume of $108 billion, including $8.1 billion in options volume at CME Group. As market participants prepare for OTC FX options clearing mandates in various regulatory jurisdictions, the connectivity of CME and FENICS will provide a conduit for OTC clients to access CME’s OTC clearing and exchange traded options. In addition, FENICS will continue to serve as the sales agent for GFI Group’s wholesale broker market data.
Today’s announcement further builds on CME Group’s infrastructure investment in Europe, which includes the launch of CME Europe, mentioned above, the CME Group European Trade Repository offering that began operations in February of this year, and the opening of CME Group Clearing Europe in May 2011 which provides clearing services for more than 200 OTC commodity and financial products as well as for CME Europe.
Transaction Structure
The transaction will be effected through a merger of GFI Group and CME Group and a concurrent acquisition of the wholesale brokerage business by an entity controlled by the private consortium of GFI Group management. GFI Group stockholders will receive shares of CME Group Class A common stock for each share of GFI Group common stock held based on an exchange ratio the numerator of which is the offer price of $4.55 per share of GFI Group common stock and the denominator of which will be the 10-day average closing price of CME Group common stock prior to the closing date of the transaction. Based on the closing price of shares of GFI Group common stock on July 29, 2014, the last day of trading prior to the announcement of the transaction, the exchange offer represents a premium of 46% to GFI Group’s share price, for a total value of approximately $580 million.
In addition, CME Group will assume $240 million in outstanding debt, for a total value of approximately $820 million. Concurrently, CME will sell GFI’s wholesale brokerage business to a private consortium led by current management for $165 million in cash and the assumption, at closing, of approximately $63M of unvested deferred compensation and other liabilities. CME expects to retire the debt in 2015. In aggregate, the total consideration is approximately $655 million for the Trayport and FENICS businesses before certain tax benefits that will be achieved based on the structure of the transactions.
GFI Group Stockholder Approval
GFI Group’s Board of Directors, acting upon the unanimous recommendation of a Special Committee of the Board comprised solely of independent and disinterested directors, approved the merger agreement and recommends that GFI Group’s stockholders vote to approve the merger agreement. In addition to the stockholder approval required by GFI Group’s organizational documents and applicable law, the agreements provide that the merger agreement must be approved by the affirmative vote of holders of a majority of GFI Group common shares that are not held by Jersey Partners Inc. and its equity holders, the officers and directors of GFI Group, and the members of the GFI Group management consortium and their affiliates (other than GFI Group). Jersey Partners Inc., GFI Group’s largest stockholder, and the members of the GFI Group management consortium and their respective affiliates have agreed to vote all of their GFI Group shares in favor of the transaction at the GFI Group stockholder meeting to approve the transaction. GFI Group will hold a Special Meeting of stockholders at a later date to vote on this matter.
Timing
The closing of the transaction is subject to certain conditions including, among other things, the concurrent merger with Jersey Partners Inc. and sale of the wholesale brokerage business, the filing by CME Group and effectiveness of a Form S-4 registration statement, receipt of the requisite approval of GFI Group stockholders, and receipt of necessary governmental and regulatory approvals. CME Group currently expects to file the Form S-4 registration statement with the Securities and Exchange Commission in the third quarter of this year and the parties expect the transaction to close early next year; however, there can be no assurance as to when or if the transaction contemplated by the definitive agreements will be consummated.
Advisors
Barclays Bank PLC is acting as financial advisor to CME Group and Skadden, Arps, Slate, Meagher & Flom LLP is acting as CME Group’s legal advisor. Jefferies Group LLC is acting as financial advisor to GFI Group and Willkie Farr & Gallagher LLP is acting as legal advisor to GFI Group and the GFI Group management consortium. Greenhill & Co. is acting as financial advisor to the Special Committee and White & Case LLP is acting as the Special Committee’s legal advisor.