Taking the joint venture (JV) to the next level,
CME Group Inc.
), owner of S&P indices, yesterday announced the commencement
of their index business with the launch of S&P-Dow Jones
CME Group owned 90% of the JV between CME Group and
) Dow Jones, which also owns Dow Jones Indexes, before the JV
between CME Group and McGraw-Hill was established in November last
year. The JV aims to tap the rapidly growing index business.
Hence, under the terms of the agreement, as approved by both
companies, McGraw-Hill will contribute its S&P Indices business
and the CME Group-Dow Jones JV will contribute the Dow Jones
Indexes business to create S&P-Dow Jones Indices, a global
leader in index services that calculates over 830,000 indices.
Approximately 575 global ETFs with $387 billion in assets invested
and another $1.5 trillion in global indexed assets are benchmarked
against these leading indices.
Accordingly, McGraw-Hill will own 73% of S&P-Dow Jones
Indices, CME Group will own 24.4% through its affiliates and Dow
Jones will own the remaining 2.6%. However, the index business has
been launched behind schedule as originally it was expected to
begin operations in the first half of 2012.
Nevertheless, S&P-Dow Jones Indices will become a part of
the new McGraw-Hill Markets Company following the separation of
McGraw-Hill into two public companies, i.e. finance and publishing,
in September 2011.
Further, as part of the new JV, S&P-Dow Jones Indices will
get into a new license agreement. Subsequently, S&P Indices
will have a share of the profits from CME Group's equity product
portfolio, which include the latter's trading and clearing business
for futures, swaps and options on futures. Alongside, the new
license agreement expands the product portfolio to include swaps
and extends CME Group's prevailing exclusive rights (currently in
place through December 31, 2017) to the E-mini and other S&P
indexed futures, thereby providing a competitive edge to the
Additionally, as part of the deal, McGraw-Hill's S&P Capital
IQ has acquired CME Group's London-based Credit Market Analysis
Ltd. (CMA), a leading source of independent data in the OTC
markets. The acquisition is further expected to expand the asset
coverage of S&P Capital IQ and add to the technological
efficiency. Besides, a separate license agreement between Platts, a
unit of McGraw-Hill, and CME Group-NYMEX will likely be
The transaction is expected to be immediately accretive to
McGraw-Hill's earnings and S&P-Dow Jones Indices is expected to
drive profit growth through enhanced revenues, asset-class
expansion, cost synergies, highly efficient infrastructure and
reduced capital requirements, while generating free cash flow. This
is also validated by the fact that three of the top five Equity
Index Futures and Options contracts traded and cleared in the first
four months of 2012 were based on S&P-Dow Jones Indices
Moreover, S&P Indices' strengths in equity, commodity,
real-estate and strategy indices complement well with Dow Jones
Indexes' leading position in equity, commodity, emerging market,
target date and dividend indices. Hence, the JV offers a complete
and adaptive platform of growing assets classes and distinct
product offerings for more global institutional and retail
Additionally, we believe that the JV will also help CME Group
achieve the benefits of diversification that will further boost the
top-and bottom-line of the company, while also adds to the
shareholders' confidence primarily amid the ongoing volatile
economic state and sluggish credit markets. Currently, CME carries
a Zacks Rank #3, which implies a short-term Hold rating.
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