ICE signs exercise rights deal with CBOE

Under the agreement:

• Full Members of the Chicago Board of Trade holding CBOE exercise rights would receive $500,000 in value for each right, or up to $665.5 million in the aggregate, to resolve the issues relating to the exercise rights in a manner that would make clear that following a merger between ICE and CBOT, Full Members of CBOT holding the required interests would be compensated for the loss of the exercise right.
• Consideration would be paid equally by CBOE and ICE, with holders of exercise rights being entitled to receive cash and/or debt securities convertible into both stock of the newly combined ICE/CBOT Holdings and common shares of CBOE after its demutualization.
• The exclusive agreement between ICE and CBOE is contingent on the completion of the proposed merger of ICE and CBOT Holdings.
• ICE and CBOE have entered into an agreement in principle for a broad commercial partnership, including technology and product development, and access to the distribution capabilities of each exchange.

Unlike the acquisition of CBOT proposed by CME Holdings, which provides no value for the exercise right eligibility of CBOT members, and no certain resolution to this critical issue, the ICE-CBOE proposal would provide CBOT Full Members with immediate value for their exercise rights and the ability to hold equity in CBOE following its planned demutualization. In addition, ICE and CBOE's agreement in principle regarding a commercial partnership provides an opportunity to create ongoing value for ICE stockholders and CBOE members.

"This strategic agreement would resolve existing litigation and uncertainty for both CBOT and CBOE members, while unlocking substantial value for CBOT members, many of whom remain CBOT Holdings stockholders. It also frees CBOE to pursue a demutualization for the benefit of its members, and importantly, accelerates ICE's ability to deliver value in options products for our stockholders and customers," said Jeffrey C. Spreccher, Chairman and CEO of ICE.

William J. Brodsky, CBOE Chairman and Chief Executive Officer, said, "We are pleased that ICE sought to address the exercise right issue and we are delighted to participate in a proposal that provides significant benefits for each organization. The offer provides CBOT members with substantial value, liquidity, and for those who choose, equity participation in CBOE. This is a unique opportunity to provide certainty for both CBOE and CBOT members, and to remove an obstacle that has impeded progress for members at both exchanges."

"This exclusive agreement with CBOE affirms ICE's consistently stated intention to provide a constructive resolution to this long-running dispute. We are eliminating a costly and potentially open-ended distraction that would otherwise persist following a completed merger between ICE and CBOT. We believe this agreement enhances our already superior proposal to merge with CBOT and underscores ICE's innovation and leadership," said Sprecher.

He added, "ICE stockholders stand to benefit through an enhanced offer for CBOT as well as a long-term cooperative relationship with the world's premier options exchange. The transaction structure - in which ICE and CBOE jointly share the cost of resolving the member rights issue - is a highly efficient use of capital."

Exercise Rights Agreement

Under the CBOE charter, CBOT Full Members holding the required interests possess an exercise right to become and remain members of CBOE, and to trade on the CBOE, so long as such members remain CBOT Full Members. In connection with ICE's proposal to merge with the CBOT, the agreement between ICE and CBOE makes clear that following the ICE/CBOT Holdings merger, CBOT Full Members holding the required interests will no longer be eligible to use the exercise right and will be compensated for the loss thereof. As part of this structure, the pending litigation between CBOE and CBOT would be settled, eliminating a major barrier to CBOE's plan to demutualize into a holding company structure.

The transactions contemplated by the ICE/CBOE agreement require approval by a majority of CBOE members and a majority of the voting power of the CBOT Series B-1 and B-2 members, and are conditioned on completion of an ICE/CBOT Holdings merger. To be eligible to receive the consideration, a CBOT Full Member would need to possess the required interests to exercise a CBOE exercise right at a designated record date prior to the merger. These interests are comprised of the following: (1) a Series B-1 membership in CBOT, (2) 27,338 shares of Class A stock of CBOT Holdings, and (3) one CBOE exercise right privilege (ERP).

The financial details of the ICE/CBOE agreement are as follows:

• ICE and CBOE would each provide up to $332.75 million in consideration (or total consideration of $665.5 million) to fund payments to CBOT Full Members possessing the required interests to exercise a CBOE exercise right.
• ICE would provide each CBOT Full Member possessing the required interests for the exercise of a CBOE exercise right the choice of (1) a cash payment of $250,000 or (2) in lieu of cash, a convertible debenture for common stock of the newly combined ICE/CBOT Holdings, which would be valued at $250,000.
• Additionally, CBOE would provide each CBOT Full Member possessing the required interests for the exercise of a CBOE exercise right the choice of: (1) a cash payment of $250,000 or (2) in lieu of cash, a convertible debenture with a face value of $250,000, which will become convertible following any event in which the memberships of CBOE are converted into stock. The CBOE debentures would be convertible into 10% of the number of shares of stock that a regular membership of CBOE not obtained through the exercise right were converted into in any such transaction.

Commercial Partnership

In addition to providing a mechanism for settling the long-standing CBOE exercise rights dispute, ICE and CBOE also announced an agreement in principle, subject to signing a definitive agreement, to collaborate on initiatives including:

• CBOE providing technical assistance to ICE regarding the engineering and rollout of ICE's new electronic options trading platform.
• CBOE providing electronic access to ICE's options products for CBOE's exchange members on its trading floor, supported through advertising on the CBOE member website and through member notices.
• ICE and CBOE working together to develop futures products and related index options products that would be beneficial to members of both exchanges. Futures products would be listed on the ICE Futures trading platform and securities options would be listed on the CBOE trading platform.
• ICE and CBOE investigating the possibility of making CBOE's regulated futures products traded on its Chicago Futures Exchange available via ICE's electronic trading platform, thereby broadening the distribution of such products to both CBOE and ICE members.

Sprecher concluded, "We have carefully listened to both the CBOT members and ICE stockholders throughout this process. We are confident that today's announcement makes our proposal to merge with the CBOT even more compelling. In addition, our proposed business partnership with CBOE would benefit ICE stockholders by accelerating ICE's existing growth prospects and creating an enhanced market position for the combined ICE/CBOT."