CBOE Holdings Inc.'s public offering appears to be more about funneling cash to members and showcasing the biggest U.S. options exchange to potential buyers than about raising capital to help it compete in a cutthroat market.
Regulatory filings for the stock sale indicate CBOE executives expect to use proceeds from the offering for general corporate purposes, but they also acknowledge that nearly all the proceeds could be returned to exchange members in two special tender offers after the IPO. CBOE also plans to let members, who will become shareholders, sell stock during the offering.
That might keep some potential investors away for fear the offering could be overpriced.
“They're going to try to get the best price for their selling shareholders,” said Michael Shinnick, a fund manager for Salt Lake City-based Wasatch Advisors Inc. Mr. Shinnick, whose firm owns 550,000 shares of NYSE Euronext Inc., said he'll likely avoid CBOE shares at least until well after the IPO.
CBOE Chairman and CEO William Brodsky's push to take the company public in the first half of the year comes as competition heats up in the options industry, where six rival exchanges pushed CBOE's marketshare down to 31% last year from 45% in 2000. New York-based International Securities Exchange Inc., the CBOE's biggest rival, trails by just five percentage points. The competition is cutting into CBOE's profits, which declined last year for the first time in four years, to $106.45 million from $115.29 million in 2008.
The competition has grown alongside a jump in trading volume. CBOE's average daily volume has soared to 1.13 billion contracts last year from 22,462 in 1974, its first full year of trading.
“Even if volumes grow exponentially, the decrease in pricing may offset all of the volume growth,” said Michael Wong, an analyst at Morningstar Inc. in Chicago.
While CBOE revenue rose last year, to $426.1 million from $416.8 million in 2008, it would have dropped if not for $24 million in access fees collected in prior years and deferred by litigation, according to the filings. Meanwhile, the CBOE is facing $300 million in costs from a legal settlement with CBOT members who claimed CBOE ownership and the exchange must shell out a $113 million dividend payment to new stockholders.