BOCA RATON, Fla. - CBOE Holdings Inc plans a $300 million public offering in a long-awaited move that could allow the biggest U.S. options exchange to expand or be acquired.
Completion of the IPO is not a given, however, since Chief Executive William Brodsky must still convince exchange members that they have more to gain than lose from the CBOE becoming a publicly traded company.
The Chicago Board Options Exchange is the last of the major old-line North American exchanges to go public. It has tried for years to convert from a member-owned structure to a share-based company, but was stymied by a long-running legal tussle over ownership rights with CME Group Inc -owned Chicago Board of Trade.
A resolution last year of that dispute, which gave some CBOT members a collective 18 percent stake in the CBOE, paved the way for the announcement on Thursday.
It was a long time coming, Brodsky said on the sidelines of the annual Futures Industry Association meeting. As a publicly traded company, CBOE will have more strategic flexibility, he told members in a memorandum.
Brodsky's most difficult challenge may still lie ahead, as he shepherds the company, valued at anywhere between $2.5 billion and $5 billion, toward an initial public offering even as it has been the subject of takeover speculation.
The conversion to a share-based company -- known as demutualization -- requires approval of CBOE's 930 members, many of whom earn lucrative incomes from leasing their memberships to traders, who use the memberships for access to the exchange.
When the exchange demutualizes, memberships will be abolished, and the exchange will start collecting access fees directly.
A special pre-IPO dividend of $113 million, and post-IPO annual dividends of 20 percent to 30 percent of prior-year net income, are promised, in part to help compensate for the loss of lease income.
Brodsky's challenge will be to convince members to support the IPO.
Given the diversity of our membership, there are bound to be differing opinions over some of these issues, Brodsky told members in the memo. We assure you, however, that each decision on the road to demutualization has been guided by what is best for the long-term success of CBOE and with the objective of maximizing value to our owners.
Meanwhile, merger speculation has surrounded CBOE for years and resurfaced in October when a media report said fellow Chicago exchange operator CME was in informal talks to buy it.
Because of the CBOE merger speculation, there will be a premium on the shares, said Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm specializing in exchanges. It will therefore likely attract retail investors and traditional funds, rather than hedge funds.
Perfumo added that, as a listed company, CBOE will be able to compete more effectively now that the options market is becoming more crowded. The BATS Options exchange launched last month, bringing to eight the number of U.S. venues.
Later on Thursday, Brodsky and other CBOE officials will meet with about 25 Florida-based members. A general members' meeting will be held on March 18 to discuss the IPO plans.
Members will be asked to approve the plan in May, and the IPO will be completed by the end of the second quarter, pending favorable market conditions, the exchange said.
Chuck Sorsby, a CBOE seat owner who supports the plans, said he was surprised by what appeared to be a generous dividend policy.
I suspect there will be support for this, he said of his fellow members.
The exchange will use proceeds from the IPO to buy back shares from its former members in two phases, within 30 to 120 days of the IPO, it said. Members get shares in exchange for their memberships in the demutualization.
As part of the settlement with the Board of Trade over ownership rights, the CBOE must make a cash payment of $300 million by Dec. 2.
The company had net income of $106.5 million last year on revenue of $426.1 million, down from $115 million earned on revenue of $416.8 million a year earlier.
The IPO will be underwritten by Goldman Sachs. (Reporting by Ann Saphir, additional reporting by Jonathan Spicer; Editing by James Dalgleish, Matthew Lewis and Steve Orlofsky)