NEX agrees takeover bid from Chicago's CME Group

CME confirmed on Thursday morning that it will pay 500p in cash and 0.0444 new shares for each NEX share in a court-sanctioned scheme of arrangement, which values NEX at £3.9bn, based on the closing price of CME stock overnight of $158.84.

The boards of the two companies have agreed that NEX shareholders will be entitled to receive a final dividend for NEX for the the year ending 31 March 2018 of no more than 7.65p per share.

NEX's headquarters will be combined with CME's and be located in Chicago, with London being retained as its European headquarters, while founder and CEO Michael Spencer will join the CME board as a special adviser and 'ambassador' for the combined company to work with key clients, regulators and officials in EMEA and Asia.

Spencer, who owns more than 16% of the shares, and his fellow directors, have provided irrevocable undertakings to vote in favour of the CME deal.

On Thursday, CME chairman and chief executive officer Terry Duffy said: "At a time when market participants are seeking ways to lower trading costs and manage risk more effectively, the acquisition will allow us to create significant value and efficiencies for our clients globally.

"As one organisation, we will be able to employ the complementary strengths of each company, while diversifying our combined businesses across futures, cash and OTC products and post-trade services."

CME sees total expected run rate cost synergies of $200m per year, equivalent to roughly 12.5% of the combined company's adjusted operating costs of $1.6bn.

Duffy paid tribute to Spencer, who founded the company that became NEX in 1986, Intercapital Brokers which eventually became Icap, saying he and his team had "built a world-class organisation that is at the center of capital markets".

"We are committed to maintaining the longstanding relationships NEX has with its clients and exchange and clearing house partners. Building on NEX's deep roots in Europe and Asia and CME's strong technology platform, we will transform our international profile and broaden our distribution network in spot and futures FX products as well as cash, repo and futures products in US Treasuries."

Spencer added that the combination "will be an industry-changing transaction", with the "unique" melding of cash and futures products and OTC services. "The technology and innovation opportunities will be diverse and extraordinary."

Following Nex's confirmed earlier this month that it had received a preliminary approach, Wednesday rumours suggested CME was looking at a take-out price of £10 per share.

Analysts at Liberum said CME's bid of 1000p was "clearly aiming to deter any competitive threat".

"This is a good price. However, the 50% cash component might be a little disappointing for some and thus leave the door ajar for a competing offer with a higher cash component. We do not discount this but the absolute level of 1000p makes it less likely than we thought before today."

In our trading comment on 16th March we joked that NEX should lock the CME representatives in a room until an offer was made (such was the excess to our 490p fair value, even on the undisturbed price of 670p).

Paul McGinnis at Shore Capital said 1,000p was an an "eye-watering" 44 times his Mar 2018 earnings per share forecast or 73 times cash flow, generating a post-tax return on investment before synergies to CME of 2.3% or 1.4% on a cash basis.

M&A specialists Olivetree Financial said: "There had been hope that there would be multiple interested parties here, but it now seems likely that CME has won the day", due to a multitude of factors including a top-end price, Spencer’s irrevocables and the scheme structure.

"The fact that the Scheme Meeting is front-end loaded (scheduled for May) isn’t entirely unusual in nature, but hints that CME aren’t entirely convinced that there isn’t a possible interloper here, they are deliberately looking to lock NXG shareholders into the transaction as soon as they can, many Scheme meetings occur AFTER regulatory approvals are attained.

"It should be noted that a number of UK M&A situations have traded strangely tight in recent months, as the market looks to pay for low-risk optionality. Expect to see NXG trade in a similar fashion, although of course the true see-thru value of the offer will only be visible during London/New York overlapping trading hours."