CME Said to Approach Deutsche Boerse to Weigh Deal Talks

CME Group Inc., the world’s largest futures exchange, has approached Deutsche Boerse AG to consider beginning talks on a merger, according to four people familiar with the situation.

CME contacted the Frankfurt-based exchange at the end of last year, before IntercontinentalExchange Inc. announced plans to buy NYSE Euronext on Dec. 20, said the people, who asked not to be identified as the information is private. Deutsche Boerse, which had its takeover of NYSE Euronext blocked by European regulators a year ago, is hesitant about entering discussions, the people said. Deutsche Boerse said it’s not in merger talks.

A combination of Chicago-based CME and Deutsche Boerse would unite the biggest futures exchanges in the U.S. and European markets. Deutsche Boerse shares surged 5.6 percent to 49.30 euros at the close of trading in Frankfurt today, the biggest jump since June, bringing its market value to 9.51 billion euros ($12.5 billion). CME rose 0.2 percent to $58.41 at 1:24 p.m. in New York, bringing this year’s rally to 15 percent and giving it a market capitalization of $19.5 billion.

“The numbers could be very compelling,” Niamh Alexander, an analyst at KBW Inc. in New York, wrote in a report today. “CME dominates futures in rates, commodities, equities and FX in the U.S. and Deutsche Boerse similar products in Europe.”

Business Overlap

Founded in the 19th century, CME’s business spans agricultural, energy, metal and financial futures linked to securities such as corn, oil, gold and interest rates. Deutsche Boerse’s Eurex business is Europe’s largest derivatives exchange, hosting benchmark contracts on German and French government bonds.

After the December approach, CME and Deutsche Boerse met again last month to debate whether to begin formal takeover talks and haven’t yet made a decision, the people said. No offer has been made, nor have terms been discussed, they said.

Frank Herkenhoff, a spokesman for Deutsche Boerse in Frankfurt, and Allan Schoenberg, a spokesman for CME in London, declined to comment. Deutsche Boerse said in a statement it’s not in merger talks with CME.

CME, like IntercontinentalExchange, has expanded in the past decade through deals, buying the Chicago Board of Trade and New York Mercantile Exchange. It unsuccessfully tried to purchase the London Metal Exchange last year. CME also approached NYSE about a deal with its derivatives business, two people familiar with the situation said last month.

‘Antitrust Risk’

“If a merger were to be pursued, the deal could take nine to 12 months to complete,” Peter Lenardos, exchange analyst at RBC Capital Markets in London, wrote in a report today. “We anticipate political and antitrust risk, since the combination would bring together the largest futures exchanges in the U.S. and European markets.”

European Union regulators blocked Deutsche Boerse’s takeover of New York-based NYSE Euronext in February 2012, citing concern that it would harm competition in derivatives and clearing. NYSE Euronext operates London-based Liffe, Europe’s second-largest derivatives market.

Deutsche Boerse already has operations in the U.S. as Eurex owns International Securities Exchange LLC, the nation’s third-biggest equity-options market. CME Chief Executive Officer Phupinder Gill said in August that the company plans to open a derivatives market in London, known as CME Europe, by the middle of 2013.

Fresh Consolidation

IntercontinentalExchange’s $8.2 billion agreement to buy NYSE Euronext has ignited a fresh round of talks for exchange companies -- already the subject of $50 billion in attempted takeovers in the past three years.

Hong Kong Exchanges & Clearing Ltd., the world’s largest bourse by market value, completed the $2.2 billion takeover of the London Metal Exchange in December. Singapore Exchange Ltd., the operator of Southeast Asia’s biggest stock market, has held talks to join London Stock Exchange Group Plc by buying a stake in LCH.Clearnet Ltd., Europe’s largest clearinghouse, according to three people familiar with the negotiations.

Nasdaq OMX Group Inc. held preliminary discussions with Carlyle Group LP about going private before the talks broke down on price, a person with knowledge of the matter said earlier this month.

Japan Exchange Group Inc., created by the merger of the nation’s two biggest bourses, may consider an alliance or merger with an overseas exchange, Chief Executive Officer Atsushi Saito said on Feb. 5. The company would consider talking with CME, Deutsche Boerse, BM&FBovespa SA, the operator of Latin America’s biggest trading venue, or Korea Exchange Inc., Saito said.

Volumes Slide

Deutsche Boerse and its rivals have seen trading volumes drop following the global financial crisis of 2008. Traditional exchanges have also lost market share to new venues such as Bats Chi-X Europe.

Deutsche Boerse last week said it set up a committee to consider opportunities in Asia as fourth-quarter earnings before interest and taxes fell 20 percent to to 185.2 million euros. Deutsche Boerse trimmed its dividend on Feb. 5 and said it will cut about 250 jobs to reduce costs.

CME would consider participating in any international exchange consolidation, Gill said at the Credit Suisse Financial Services Forum in Miami on Feb. 12.

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