CBOE Holdings Raises $339 Million Pricing IPO at Top of Range
By Lee Spears and Inyoung Hwang
June 15 (Bloomberg) -- CBOE Holdings Inc., the last major U.S. securities exchange owned by its members, completed its transformation into a public company with an initial public offering that snapped a two-week drought in American IPOs.
The operator of the biggest options exchange raised $339 million selling 11.7 million shares at $29 each after offering them at $27 to $29, data compiled by Bloomberg and a Securities and Exchange Commission filing showed. The shares will start trading today on the Nasdaq Stock Market under the ticker CBOE.
The sale came after Europe’s debt crisis spurred at least 33 companies worldwide to postpone or withdraw IPOs since April. Derivatives trading increased almost fivefold in the past decade and the CBOE is the venue for options based on the Standard & Poor’s 500 Index and the VIX gauge of U.S. equity volatility.
“Pricing at the upper end was justified,” said David Goerz, who oversees $17 billion at Highmark Capital Management Inc. in San Francisco. “The CBOE is going to have an advantage in growing profitability. There’s hope for significant upside for derivatives-related exchanges in particular.”
Goldman Sachs Group Inc. of New York was hired to lead the sale. Chicago-based Schiff Hardin LLP provided legal advice.
CBOE was the first American company to sell shares in an initial offering since Pasadena, California-based GenMark Diagnostics Inc. on May 28. IPOs had dried up as concern the European debt turmoil is spreading beyond Greece and slower- than-estimated U.S. jobs growth in May helped push the S&P 500 down 10 percent from its 2010 high on April 23.
Valuations, Takeovers
At the IPO price, CBOE is at least 53 percent more expensive than NYSE Euronext and Deutsche Boerse AG. Record derivatives trading and the potential for a takeover by its competitors help justify the premium, Chicago-based IPOX Capital Management LLC, which invests in IPOs, said before the sale.
The Chicago Board Options Exchange, now called CBOE, was founded in 1973 as the first public venue for trading equity options. It began with products based on 16 companies listed on the New York Stock Exchange and introduced options based on stock indexes in 1983.
The CBOE S&P 500 Volatility Index, or VIX, which measures how much investors will pay to protect against losses in the S&P 500, posted its biggest weekly increase on record last month after the Dow Jones Industrial Average briefly tumbled almost 1,000 points before recouping some of its losses.
‘Very Optimistic Future’
“They’re selling a product that’s going to be in great demand,” said Michael Yoshikami, who oversees about $1 billion as chief investment strategist at YCMNet Advisors in Walnut Creek, California. “In the world we live in right now where people want to buy more and more insurance against uncertainty, CBOE has a very optimistic future.”
CBOE, which became a for-profit company in 2006, is converting each of its 930 seats into 80,000 Class A shares, accounting for 74.4 million, according to a filing with the SEC. Some former members of the Chicago Board of Trade that helped establish the CBOE will together receive 16.3 million Class B shares. Both Class A and Class B shares become common stock.
About 2.09 million of those shares were offered in CBOE’s 11.7 million share sale. The remaining stakes held by owners can’t be sold to the public for 180 days to 360 days.
The cost of a CBOE seat in the past two decades through last week had been as low as $131,500 in August 2002 and as high as $3.3 million in June 2008, data compiled by the CBOE and Bloomberg show. At 80,000 shares a seat, the per-share expense has ranged from $1.64 to $41.25 and averaged $10.89.
That means the initial sale handed owners an immediate paper gain of 166 percent on average at $29 a share.
Members’ Payout
That’s in addition to the $100,000-a-seat payout each CBOE member received, which will cost the exchange about $113.4 million. The expense exceeds the amount the company earned in all of 2009, data compiled by Bloomberg show.
Speculation that CBOE may be acquired helped spur Thomas Caldwell, who owned 56 seats as chairman of Toronto-based Caldwell Financial Ltd., to add to his holdings this month.
The industry had at least $61 billion of acquisitions since 2007, data compiled by Bloomberg show. Nymex Holdings Inc., CBOT Holdings Inc. and International Securities Exchange Holdings Inc. were bought within three years of their IPOs after government regulations boosted competition.
“It would have been impossible for anyone to take over CBOE prior to it becoming a public company,” said Caldwell. “Once you are a public company the market decides your value.”
Relative Value
Buyers of the IPO paid 22.5 times CBOE’s estimated 2010 earnings of $1.29 a share, according to data compiled by Diego Perfumo, an analyst who covers exchanges at Equity Research Desk LLC in Greenwich, Connecticut.
That’s more than the two biggest publicly traded U.S. derivatives exchanges. Chicago-based CME Group Inc., the world’s largest futures market, is valued at 18.9 times projected earnings, and IntercontinentalExchange Inc. of Atlanta, the second-biggest U.S. futures market, trades at 21.3 times estimated profit, data compiled by Bloomberg show.
NYSE, which generated 39 percent of its operating profit from derivatives last year, and Deutsche Boerse, part-owner of the International Securities Exchange, CBOE’s largest competitor in U.S. equity options, also trade at a discount to the Chicago- based bourse. NYSE, the world’s biggest equity exchange, is valued at 12.1 times 2010 estimated profit, and Frankfurt-based Deutsche Boerse trades at 14.7 times.
Trading Fees
CBOE, which makes most of its money from trading fees, accounted for 32 percent of options volume in May, when trading reached a record 405.9 million contracts, according to Chicago- based Options Clearing Corp. That’s 13 percentage points more than ISE of New York, which had one in every five contracts.
Per-share earnings at CBOE may climb 22 percent this year on increasing demand for equity derivatives, according to an estimate by Equity Research Desk. That’s more than the CME’s 19 percent gain and the 13 percent increase for the NYSE, analysts’ estimates compiled by Bloomberg show. Deutsche Boerse’s profit may decline 9 percent in 2010.
CBOE is the first of six initial offerings that are scheduled for this week, data compiled by Bloomberg show. Five companies are slated to sell shares tomorrow. Houston-based Oasis Petroleum Inc., the drilling and exploration company with oilfields in Montana and North Dakota, is seeking as much as $630 million in what would be the largest U.S. IPO this year.
“If you look at the IPOs that have priced here of late, it’s been a mixed bag,” said YCMNet’s Yoshikami. CBOE “is not indicative of the IPO market per se, because this is a unique company in a unique space,” he said. |
