CME Inks Deal to Buy Nymex

CME Group (CME Quote - Cramer on CME - Stock Picks) has signed a deal to buy the parent company of the New York Mercantile Exchange, Nymex Holdings (NMX Quote - Cramer on NMX - Stock Picks), in a nearly $9.5 billion transaction.

Although the heightened volatility of the market would make a deal of this nature seem risky, these markets actually thrive on instability. "Nymex has feasted on market turbulence and extremes of volatility," said Isabel Schauerte of Celent, a Boston-based research firm.

Shareholders of Nymex will get $3.4 billion in cash and $6.08 billion in stock. Priced at $100.30 per share, the deal is valued at about $9.48 billion, based on roughly 94 million shares outstanding as of Feb. 20. The combined entity is expected to see pretax $60 million in cost savings.

The complementary product offerings are expected to strengthen the combined company's position in cash, over-the-counter trading and the energy markets. "We see the move into energy and metals futures as an important diversification step for CME. Early results from this relationship have exceeded our expectations, with CME generating over $56 million in revenue from processing Nymex's electronic transactions during 2007," Jason Willey of Standard & Poor's wrote in a report last week.

CME Group Executive Chairman Terry Duffy said in a statement that the deal will continue "both of our companies' traditions of finding innovative ways to create value for our customers and shareholders." Upon completion of the transaction, Duffy will remain executive chairman of CME. Craig Donohue will remain CEO. Three directors from Nymex will be added to the board.

Just last year, the Chicago Mercantile Exchange combined forces with the Chicago Board of Trade, then quickly followed up with the decision to bring on Nymex. The consolidation has been so quick that the Justice Department chimed in, citing concern over the exchange's control of the clearing aspects of the market. The new entity will control roughly 70% of all futures volume.

The stock of CME tumbled at the time, even with politicians and others speaking out against the suggestions by the Justice Department. Shares had recently started to recover from a February low of $87.50, but had dropped along with other financial stocks and were selling for $88 on Monday.

Although the stock has traded down, most analysts are positive about the merger. According to Thomson Financial, four out of five analysts had upgraded the stock over the last five months.

"Consolidation within the industry has helped bring added operating efficiencies and increased the market power and product offerings of leading exchanges," Willey said. "We believe these changes will continue to have a positive impact on the financial results of the subsector."

Another exchange, NYSE Euronext (NYX Quote - Cramer on NYX - Stock Picks), announced last Friday that it was buying CME's metal exchange platform for an undisclosed amount. CME will provide clearing services for another year. It was only last April that the New York Stock Exchange joined with Euronext, bringing together the marketplaces of the U.S. and Europe. The NYSE dates back to 1792 and the former Chicago Butter & Egg Board (now the CME) was founded in 1898.

The CME deal for Nymex is expected to be completed in the fourth quarter.