CBOE Files to Sell as Much as $300 Million in IPO (Update3)
March 11, 2010, 5:15 PM EST(Adds use of proceeds in seventh paragraph and CME’s deal in second-to-last paragraph.)
By Whitney Kisling
March 11 (Bloomberg) -- The Chicago Board Options Exchange, the largest U.S. equity derivatives market and the last major member-owned American bourse, filed to sell as much as $300 million in stock in an initial public offering.
CBOE Holdings Inc. plans to convert its ownership to about 68 million shares as part of a process to demutualize and offer stock publicly, according to filings today with the Securities and Exchange Commission. The Chicago-based company will pay a special dividend of $1.67 for each share outstanding after the restructuring, amounting to $113.6 million, the filings showed. The bourse did not disclose the number of shares to be sold or the price range for the offering.
Directors at CBOE approved a plan in December to change the structure and swap seats for shares. The vote followed a November agreement by the CBOE to pay $4.17 million to settle appeals in a three-year-old lawsuit related to its ownership.
“This is a culmination of many months of work,” William Brodsky, chief executive officer of the CBOE, said at a conference in Boca Raton, Florida, sponsored by the Futures Industry Association, a trade group based in Washington.
CBOE will issue 55.8 million Class A shares to its members and 12.25 million Class B shares to former members of the Chicago Board of Trade who helped create the exchange in 1973. The offering will be managed by New York-based Goldman Sachs Group Inc.
Seat Prices
The 930 current seats, or memberships, will each be given 60,000 shares of Class A stock, valued at $49.17 each based on the price of a seat sold today for $2.95 million. The seat prices help determine the value of the exchange, as the price of shares determine the value of a public company. The price reached a record high of $3.3 million in June 2008.
Upon completion of the IPO, half the shares held by both Class A and Class B owners will convert into stock that can’t be sold for 180 days. The remaining holdings will be swapped for shares that they’re required to keep for 360 days. The proceeds from the IPO will be used in tender offers for the outstanding shares.
CBOE spokesman Gary Compton declined to comment beyond the filing on details of the initial offering process.
‘Better Feel’
“This is definitely only the first aspect,” said Paul Zubulake, a senior analyst at Boston-based Aite Group LLC, who covers futures and options. “It’s really just that initial regulatory filing. As we get a little closer, we’ll get a better feel.”
CBOE’s offering would come after eight U.S. companies delayed or postponed IPOs this year and the 13 that completed deals cut their offerings by 26 percent on average, data compiled by Bloomberg show.
The Chicago Board of Trade was acquired by the Chicago Mercantile Exchange in 2007, creating CME Group Inc., the world’s largest futures exchange. Board of Trade members’ ownership rights were written into the CBOE’s incorporation documents after CBOT members created it in 1973.
Swapping seats for shares also sets the exchange up for the possibility of a takeover because an acquiring company would only have to negotiate with CBOE management, as opposed to all of the seatholders, said Jon Najarian, the co-founder of OptionMonster.com, who owns seats at the CBOE and CBOT.
Trading Fees
Net income at CBOE has surged in the past four years, increasing ninefold to $106.5 million last year from 2005, according to today’s filing. Operating revenue has more than doubled to $426.1 million in the same period. The exchange makes most of its money from fees charged for trading on its platform, and sales usually rise as volume increases.
CBOE is the nation’s largest options market by volume, with 30.7 percent of the market in February, according to data from the Options Clearing Corp. It has an exclusive license to trade contracts linked to the VIX, as the CBOE Volatility Index is known, and to the Standard & Poor’s 500 Index, which Najarian said makes it attractive to potential buyers. NYSE Euronext is the second-largest exchange operator by volume.
CME agreed last month to take control of New York-based News Corp.’s stock-index business to bolster revenue by licensing equity benchmarks. CME, the Chicago-based owner of the world’s largest futures market, was paying fees to News Corp., which owns the 114-year-old Dow Jones Industrial Average, to base futures contracts on the index.
A CBOE takeover “gives you basically everything in the U.S.,” Najarian said. “CBOE is a stock exchange, futures exchange and options exchange, and it’s the only place where you can trade securitized products on the S&P.”
--With assistance from Nina Mehta in Boca Raton, Florida, and Michael Tsang and Jeff Kearns in New York. Editors: Daniel Hauck, Chris Nagi.
To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
