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CBOE Holdings Likely to Acquire Bats Global for $3.2 Billion


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CBOE Holdings Inc. (CBOE - Analyst Report) recently announced its decision to acquire Bats Global Markets (BATS - Snapshot Report) for $3.2 billion in a cash-stock deal. The transaction is expected culminate in the first half of 2017. The acquisition will help CBOE Holdings address the increasing demand for index–based investing market.

Transaction Details

The purchase consideration of $3.2 billion, which consists of 31% cash and 69% CBOE Holdings stock, translates to $32.50 per Bats Global share.  The transaction price is based on the acquirer’s closing stock price of $70.30 per share as of Sep 23, 2016 and represents about 22.5% premium to Bats Global's closing stock price on Sep 22, 2016.

According to the definitive agreement signed by the companies, CBOE Holdings will finance the purchase consideration through stock and debt. The acquirer will use its cash and new borrowings of $1.65 billion to fund the transaction.

Shareholders of Bats Global will receive $10.00 per share in cash and 0.3201 of a share of CBOE Holdings common stock.

Details of the Acquisition

The acquisition of Bats Global will expand and diversify CBOE Holdings’ product portfolio with the addition of U.S. and European cash equities, Global ETPs and Global FX. The combined entity will not only offer industry-leading market data products and services but will also enjoy a compelling global distribution network. This apart, the acquisition will widen CBOE Holdings global reach with solid pan-European equities and global FX positions. The acquirer’s business mix would also be diversified as the deal will open up non-transactional revenue generating avenues.

CBOE Holdings' chief executive officer, Edward T. Tilly, believes that the deal will be “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.” Tilly also referred to the deal as “a compelling combination that should deliver significant benefits” for the company’s customers as well as ensure better long-term value for its investors. The acquisitions will provide CBOE Holdings greater scale along with operational and cost efficiencies.

CBOE Holdings is estimated to achieve $50 million in annualized expense synergies within three years of the acquisition. The metric is expected to increase to $65 million of within five years of the closure of the transaction. The acquirer expects to achieve the synergies through its shift to a single proprietary trading platform and by optimizing the expense structure of the combined entity.

On the other hand, shareholders of Bats Global stand to gain from immediate cash value as well as opportunity to boost growth by leveraging CBOE Holdings’ expertise.

The transaction will be accretive to the acquirer’s bottom line in the first year post the closure of the acquisition. It will also help the company to generate solid returns on invested capital.

Three of Bats Global’s board members will join CBOE Holdings’ board post the closure of the deal.

Inorganic Growth Story

CBOE Holdings eyes strategic acquisitions to gain a competitive edge by diversifying as well as adding capabilities to its portfolio. This May, the securities exchange purchased stakes in Eris Exchange Holdings, LLC, a U.S.-based futures exchange group offering swap futures as a capital-efficient alternative to over-the-counter swaps.

Acquisitions Ramping Growth Profile

CBOE Holdings, like other industry peers, has been facing intense competition as increased market consolidation tends to reduce market share and leverage of business. Hence, strategic acquisitions like this are expected to help the securities exchange retain its market share. Also, the industry is trying to counter soft trading volumes and contracting margins with more consolidations. Nasdaq Inc. (NDAQ - Analyst Report) closed the acquisitions of both International Securities Exchange (ISE) and Boardvantage in the second quarter of this year. Intercontinental Exchange Group Inc. (ICE - Analyst Report) is acquiring the majority equity position in Mortgage Electronic Registrations Systems, Inc. (collectively known as “MERS”).

Zacks Rank

CBOE Holdings currently carries a Zacks Rank #4 (Sell). With optimism over the current acquisition, we expect analysts to raise their estimates, in turn leading to a rank upgrade. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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