The Bloom Is Off the Commodity Rose

By Brad Zigler

This is the time of year that rose blossoms should be putting on a real show. The bloom that once graced commodity exchange share prices (see "Commodity Investing Through Exchange Shares") however, has faded even though futures prices and trading volumes are still setting records.

Bloomin' Awful - Commodity Exchange Prices Vs. Futures

It's gotten so bad that the CME Group (NYSE: CME), parent of the Chicago Mercantile Exchange, is offering to take on $4 billion of debt to complete its planned purchase of NYMEX Holdings (NYSE: NMX), the New York Mercantile Exchange's holding company. The debt will be used to sweeten the deal with a $1.1 billion stock buyback and a special $5-a-share dividend.

Under the terms of the proposal floated by the CME board, the dividend would be paid and the stock repurchased after CME's acquisition of NMX is completed, now forecast for the fourth quarter.

The value of the NMX deal, originally valued at $11 billion in January, has fallen to $9 billion as CME share prices swooned 36% this year. Not that NMX is doing much better: Its stock price has fallen 31% for the year.

The Chicago mart's bosses have been waiting for deal approval by New York Mercantile members, NMX shareholders and the Securities Exchange Commission. Enthusiasm for the cash-and-stock transaction has cooled as its effective offer price shrank. The deal was worth $106.22 back in February (see "Time's Expired For CME_NYMEX ... No, Wait!") but is now worth $93.81 a share on the basis of Monday's close. CME's still dangling a premium in front of NMX holders, though. NMX closed at $90.97 Monday.

CME's had quite a taste for acquisitions since going public in 2002. Its latest gobble was a $12 billion purchase of cross-town rival CBOT Holdings. The mart's appetite would be sated if the NMX deal closes, according to the honchos in Chicago.

That's being spun beautifully, too.

"With the completion of the merger with CBOT and the pending acquisition of NYMEX," says CME chief executive Craig Donohue, "our need to significantly build cash balances has changed."

Well, heck. What's left to buy?