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Expanding its band of grain future contracts, on Wednesday CME Group Inc. (CME - Analyst Report) announced its intention to acquire rival exchange – Kansas City Board of Trade (KCBT) – for cash payment of $126 million. Subject to regulatory approval, the deal is expected to culminate by the end of this year.

Additionally, CME Group is committed to pay a special distribution of excess cash to members of KCBT upon the successful culmination of the transaction. The company will also set up a team, comprising KCBT market participants, to advice on HRW wheat contract terms and conditions for at least 3 years, and to keep the KCBT trading floor open in Kansas City for at least 6months.         

KCBT is the leading exchange for high quality hard red winter wheat futures and options contracts. Hence, CME Group has successfully bagged an important market since thus far, the company was dealing in low quality hard red winter wheat. All types of hard red winter wheat are expected to be 44% of total wheat production in the US this year. Moreover, the rising demand for such products amid the ongoing regulatory environment underscores the significance of the acquisition.

Additionally, operational expansion into agricultural futures is crucial for CME’s sustainability and maintaining its competitive leverage. The acquisition bodes well for the company given its rampant expansion into the futures of grains, other agricultural and non-agricultural commodities. Following the acquisition of KCBT, the company will gain control over all the wheat futures in the US. The deal also bears immense scope of product development for the clientele of both the parties.

CME Group has been consistently making efforts to maintain leading position in the global derivative market. The company is also seeking to bid for other important exchanges like Minneapolis, which is the only wheat exchange left untapped by CME Group.

Such agricultural products are unraveling new growth avenues that are being developed rapidly and are being equally eyed by arch-rivals such IntercontinentalExchange Inc. (ICE - Analyst Report), who was also seeking the acquisition of KCBT to maintain its dwindling position in the agricultural markets business. In March 2008, IntercontinentalExchange also lost its bid to CME Group for purchasing Chicago Board of Trade (CBOT).

Meanwhile, the latest acquisition counts as the first purchase of a rival exchange in 5 years, the last being the acquisition of NYSE Euronext Inc.’s the energy-focused New York Mercantile Exchange (NYMEX). Before that, the company took control of Chicago Mercantile Exchange and CBOT. 

We believe although debt obligations, interest rate volatility and rising competition pose operational risk to the company, CME’s efforts to promote, expand and cross-sell its core exchange-traded business through newer product initiatives along with its global presence will generate a modest growth in the long run.

CME Group carries a Zacks Rank #4 that implies a short-term Sell rating, while the long-term recommendation stands at Neutral.

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