Expanding its band of grain future contracts, on Wednesday
CME Group Inc.
) announced its intention to acquire rival exchange - Kansas City
Board of Trade (KCBT) - for cash payment of $126 million. Subject
to regulatory approval, the deal is expected to culminate by the
end of this year.
Additionally, CME Group is committed to pay a special
distribution of excess cash to members of KCBT upon the
successful culmination of the transaction. The company will also
set up a team, comprising KCBT market participants, to advice on
HRW wheat contract terms and conditions for at least 3 years, and
to keep the KCBT trading floor open in Kansas City for at least
KCBT is the leading exchange for high quality hard red winter
wheat futures and options contracts. Hence, CME Group has
successfully bagged an important market since thus far, the
company was dealing in low quality hard red winter wheat. All
types of hard red winter wheat are expected to be 44% of total
wheat production in the US this year. Moreover, the rising demand
for such products amid the ongoing regulatory environment
underscores the significance of the acquisition.
Additionally, operational expansion into agricultural futures
is crucial for CME's sustainability and maintaining its
competitive leverage. The acquisition bodes well for the company
given its rampant expansion into the futures of grains, other
agricultural and non-agricultural commodities. Following the
acquisition of KCBT, the company will gain control over all the
wheat futures in the US. The deal also bears immense scope of
product development for the clientele of both the parties.
CME Group has been consistently making efforts to maintain
leading position in the global derivative market. The company is
also seeking to bid for other important exchanges like
Minneapolis, which is the only wheat exchange left untapped by
Such agricultural products are unraveling new growth avenues
that are being developed rapidly and are being equally eyed by
), who was also seeking the acquisition of KCBT to maintain its
dwindling position in the agricultural markets business. In March
2008, IntercontinentalExchange also lost its bid to CME Group for
purchasing Chicago Board of Trade (CBOT).
Meanwhile, the latest acquisition counts as the first purchase
of a rival exchange in 5 years, the last being the acquisition of
NYSE Euronext Inc.'
) the energy-focused New York Mercantile Exchange (NYMEX). Before
that, the company took control of Chicago Mercantile Exchange and
We believe although debt obligations, interest rate volatility
and rising competition pose operational risk to the company,
CME's efforts to promote, expand and cross-sell its core
exchange-traded business through newer product initiatives along
with its global presence will generate a modest growth in the
CME Group carries a Zacks Rank #4 that implies a short-term
Sell rating, while the long-term recommendation stands at
CME GROUP INC (CME): Free Stock Analysis
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