Recently, CME Group Inc. (CME - Analyst Report) announced the completion of the acquisition of the rival exchange – Kansas City Board of Trade (KCBT) – for cash payment of $126 million. The deal was inked in October this year.
The KCBT acquisition is another attempt by CME Group to expand its band of grain future contracts portfolio. With this acquisition, CME Group has gained control over all the wheat futures in the US. The deal also provides immense scope of product development to the clientele of both the parties.
Meanwhile, KCBT has begun active trading futures of hard red winter wheat on the CME Globex platform. However, the complete integration of the business is scheduled to take place in the first quarter of 2013.
KCBT is the leading exchange for high-quality hard red winter wheat futures and options contracts. Hence, it can be stated that CME Group has successfully bagged an important market since the company was dealing in low quality hard red winter wheat before this aforesaid acquisition. 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 as well as other agricultural and non-agricultural commodities.
CME Group has been consistently making efforts to maintain a strong position in the global derivative market. The company is also seeking to bid for other important exchanges such as Minneapolis, the only wheat exchange left untapped by the company.
Such agricultural products are unraveling new growth avenues that are being developed rapidly and equally eyed by arch-rivals such as IntercontinentalExchange Inc. (ICE - Analyst Report) , who was also seeking the acquisition of KCBT to maintain its dwindling position in the agricultural markets business.
We believe that the KCBT acquisition was crucial for providing some cushion to CME Group’s fraying trading volumes, although it instigated cash outlay. The company carries a Zacks Rank #4 that implies a short-term Sell rating, while the long-term recommendation stands at Neutral.