CME Group Inc. secured the backing of Nymex Holdings Inc.s largest shareholder, private equity firm General Atlantic LLC, as a key condition for its multibillion-dollar bid to acquire the parent of New York Mercantile Exchange, according to a regulatory filing.
The March 16 voting and support agreement between CME Group and several General Atlantic LLC investment units, referred to in the filing as stockholders, was posted on the SEC on website Friday. General Atlantic, which had bought 10% of Nymex for $170 million in 2006 before the exchange went public, owned 6.2 million Nymex shares or 6.66% of the company as of March 16.
Whereas, as an inducement and a condition to entering into the merger agreement, CME Group has required that stockholders enter into this (voting and support) agreement, the filing said.
Each stockholder understands and acknowledges that CME Group is entering into the merger agreement in reliance upon the execution and delivery of this agreement by stockholder. Each stockholder agrees not to seek appraisal or assert any rights of dissent from the merger that stockholder may have, the filing also said.
The day after striking this agreement, CME announced its intent to buy the parent of the Nymex, the worlds largest energy exchange, in a stock-and-cash deal valued at $8.9 billion, based on CME shares closing price on March 17.
Also on March 17, attorneys for Nymex member Cataldo Capozza, who owns 170,000 Nymex shares, filed a suit in the Delaware Chancery Court seeking class-action status against Nymex, its directors and CME Group, alleging grossly inadequate consideration of Nymexs value and breach of fiduciary duties. The suit asked the court to stop the merger until Nymex implements a process to obtain the highest possible price for shareholders.
CME is offering 0.1323 CME share plus $36 in cash for each Nymex share, which valued the energy exchange at more than $11 billion on Jan. 28, when the merger talks were first made public, and as little as $8.3 billion on March 17. Both the CME and Nymex hit their respective 52-week low on the day of the merger announcement.
The suit said that, when Nymex executives met with analysts and institutional investors on Aug. 21, 2007, they had valued the energy exchange at $14 billion. The suit also refers to a proposed secret bid for Nymex at that time at a meaningful premium, which did not materialize because Nymex Chairman Richard Schaeffer allegedly demanded a seat on the board of the new company.
The voting and support agreement between CME and General Atlantic, described in the filing as an inducement and a condition for the CME to sign the merger agreement, would likely spare the Chicago derivatives powerhouse a repeat of last years bidding war for the Chicago Board of Trade.
After the IntercontinentalExchange submitted a counterbid for the CBOT in March 2007, the CME was dragged into lengthy negotiations with CBOT shareholders. The CME won the spirited fight three months later, but only after agreeing on a higher price with Australian hedge fund Caledonia Investments, then the largest CBOT shareholder, with a 6.6% stake. Caledonias threat to vote against the deal had encouraged smaller CBOT shareholders to push for a sweeter deal as well.
The early backing of General Atlantic even before proxy materials are available to shareholders of both exchanges who must approve the proposed merger lessens the prospects of a Caledonia-type fight. Also, Nymex uses CMEs Globex platform to trade its contracts electronically under an exclusive agreement, which makes it less appealing to other suitors.
In a March 19 regulatory filing, the CME said, such (proxy) documents are not currently available. The merger is also subject to regulatory approval.
The CME has also entered a voting and support agreement with Nymex CEO James Newsome and Chairman Richard Schaeffer.
Pursuant to the voting and support agreement, Mr. Schaeffer also agreed to accept the membership purchase offer, the filing said, referring to the proposed purchase of the 816 outstanding Nymex Class A memberships for a maximum of $500 million or $612,000 per membership. At least 75% of the membership must be sold to the CME for the deal to close.
Those trading rights have a true value substantially higher than that price, Mark Rifkin, an attorney with the law firm Wolf Haldenstein Adler Freeman & Herz, wrote in the complaint filed on behalf of Mr. Capozza.
The complaint further claims that the CME-Nymex negotiation process was flawed. Nymex maintains a policy that mandates the formation of a special committee to review, negotiate and recommend any possibly business combination or acquisition. The company (Nymex) chairman, defendant Richard Schaeffer, circumvented this process by exclusively engaging in discussions with CME to further his own personal interests at the expense of Nymexs public shareholders, the suit said.
Spokesmen for both Nymex and the CME declined to comment. But in a March 3 letter to Mr. Capozza obtained by Pensions & Investments, CME General Counsel Richard Kerschner wrote: I object to your false statements and the false and misleading allegations you make about Mr. Schaeffer and Dr. Newsome, and, by implications, our entire board of directors. Mr. Kerschners letter was a response to Mr. Capozzas Feb. 27 letter to Mr. Schaeffer which contained allegations similar to those contained in the filing.
Other major Nymex shareholders as of Dec. 31, 2007, include Vanguard Group, with a 2.56% stake; Barclays Global Investors, with 2.56%; and Fred Alger Management Inc. BGI and Vanguard are also among the five largest shareholders of CME.
Public pension funds with the largest investments in Nymex include: the California Public Employees Retirement System, with 0.38%; the State Teachers Retirement System of Ohio, with 0.35%; and Ohio Public Employees Retirement System, with 0.34%.