CBOE & BATS Deal-30 Years in the Making

Note from the CEO:  CBOE to buy BATS. Like you were told (or should have been) by your parents, if you don’t succeed try, try again. Or, at least wait 30 years. Yup, almost to the day, in September 1986 the CBOE acquired the lonely Cincinnati Stock Exchange to bring stock trading to the options floor. Didn’t work. The BATS deal might since it does have a working business AND the exchange doesn’t need all those wild idiots in colored coats running around. Just plug the black box into the wall.

-AND-

Note from the Publisher:  For those of you who may not know, our CEO Bill Taylor was one of the original “wild idiots in colored coats running around”, er excuse me, I mean an original member of the CBOE when it was first launched and moved into the CBOT’s smoking lounge.  So there’s a little bit of personal history behind the story.

“CHICAGO and KANSAS CITY, Kan., Sept. 26, 2016 /PRNewswire/ — CBOE Holdings, Inc. (NASDAQ: CBOE) and Bats Global Markets, Inc. (Bats: BATS) today announced that they have entered into a definitive agreement, which has been approved by the Board of Directors of each company by unanimous votes of the members of the boards present, under which CBOE Holdings has agreed to acquire Bats in a cash and stock transaction valued at approximately $32.50 per Bats share, or a total of approximately $3.2 billion, consisting of 31% cash and 69% CBOE Holdings stock, based on CBOE Holdings’ closing stock price of $70.30 per share on September 23, 2016.

The transaction will significantly expand CBOE Holdings’ product line across asset classes, broaden its geographic reach with Bats’ strong pan-European equities and global FX positions, and diversify its business mix with significant non-transactional revenue streams.  CBOE Holdings expects to utilize Bats’ leading proprietary trading technology by migrating trading in all of the combined company’s markets onto a single, proven platform. 

“The acquisition of Bats is expected to strengthen our position as a global leader in innovative tradable products and services, and is a transformative next step in our growth strategy,” said Edward T. Tilly, CBOE Holdings’ Chief Executive Officer. “We believe that bringing together CBOE Holdings’ product innovation, indexing expertise, and options and volatility market position, with Bats’ proven proprietary technology infrastructure, global ETP listing and trading venues, global foreign exchange marketplace and market data services, represents a compelling combination that should deliver significant benefits for our customers and enhanced long-term value for our stockholders.  In particular, we believe the complementary nature of our respective offerings uniquely positions the combined company to provide the product set, transparency and tradability demanded by the rapidly-developing index-based investing market. Further, Bats’ market data expertise will allow CBOE Holdings to develop new products using the company’s index calculation capabilities.”

Mr. Tilly continued, “CBOE Holdings and Bats share a culture based on the goal of efficiently utilizing innovation to better serve customers and the broader marketplace while enhancing stockholder value.  We expect the acquisition to enhance the trading experience by streamlining access for customers and to allow CBOE Holdings to provide greater scale, while significantly increasing operational and cost efficiencies.”

“This transaction offers our stockholders immediate cash value and allows us the opportunity to continue our great growth trajectory by combining with another market innovator in CBOE,” said Chris Concannon, Bats’ Chief Executive Officer. “Today’s announcement is a testament to the hard work and achievements of our talented employees around the globe and in every asset class in which we operate. We look forward to working with the CBOE team to facilitate a smooth integration.”

Following the closing of the transaction, CBOE Holdings expects to incorporate the functionality offered by both technology platforms and migrate onto a leading proprietary Bats’ system. By utilizing Bats’ technology and the combined customer reach of CBOE Holdings and Bats, CBOE Holdings plans to broaden distribution of its expanded product line to provide greater breadth and depth of products and services.

Financial Benefits

The transaction is expected to provide meaningful scale and financial benefits to CBOE Holdings, and should enable the company to further grow and capitalize on significant synergies expected to be achieved through the acquisition.  Within three years of the completion of the transaction, CBOE Holdings expects to realize $50 million in annualized expense synergies, increasing to approximately $65 million of anticipated expense synergies within five years following closing. CBOE Holdings expects to achieve these synergies by migrating to a single proprietary trading platform and optimizing the expense structure of the combined company.

The transaction is expected to be accretive to CBOE Holdings adjusted EPS in the first year following the completion of the transaction and deliver attractive returns on invested capital. 

Transaction Terms, Approvals and Timing

CBOE Holdings will acquire Bats for approximately $3.2 billion (based on CBOE’s closing stock price on September 23, 2016), and will fund the purchase price through a mix of stock and debt. Under the terms of the agreement, Bats stockholders will receive $10.00 per share in cash and 0.3201 of a share of CBOE Holdings common stock, representing a total consideration of approximately $32.50 per share, based on the closing price of CBOE Holdings common stock on September 23, 2016. The merger agreement also contains an election procedure allowing each Bats stockholder to seek all cash or all stock, subject to proration and adjustment.  The company intends to fund the cash portion of the consideration and the refinancing of Bats’ debt through available cash and new borrowings of $1.65 billion, for which commitment letters have been obtained.  
The per-share consideration represents a premium of 22.5% to Bats’ closing stock price on September 22, 2016, the last full trading day prior to media publications regarding the potential transaction.

The transaction is subject to customary closing conditions, including the approval of the stockholders of both companies, and receipt of required regulatory clearances and approvals.  Bats’ and CBOE Holdings’ directors and officers have signed supportive voting agreements.  The transaction is expected to close in the first half of 2017. 

Organization and Leadership

Following the close of the transaction, Edward T. Tilly, CBOE Holdings CEO, will remain CEO of the combined company.  Chris Concannon, Bats CEO, will become President and COO, succeeding Edward L. Provost, CBOE Holdings President and COO, who plans to retire at that time.  Chris Isaacson, Bats CIO, will succeed Gerald T. O’Connell as CIO, who also plans to retire at that time.  CBOE Holdings CFO Alan J. Dean will remain as CFO of the combined company.

Following the close of the transaction, the Board of Directors of the combined company will consist of 14 directors, 11 of the 14 members currently serving on the CBOE Holdings board, plus three members from the Bats Board of Directors.  These changes will be effective immediately upon closing.
The combined company’s corporate headquarters will be located in Chicago, with business offices in Kansas City, New York and London, as well as presences in San Francisco, Singapore and Quito, Ecuador.”

Read Full Press Release at IR.CBOE.com