ICE and IPE Consider Merger

In a proposal that calls for the London-based International Petroleum Exchange (IPE) to migrate all of its existing open-outcry-traded products to an automated trading platform, the Intercontinental Exchange (ICE)--an Atlanta-based, all-electronic, over-the-counter (OTC) market for trading energy and metals contracts--last week submitted a bid to acquire IPE Holdings--the parent of the IPE. If the proposal gets approved by IPE Holdings' shareholders, the petroleum exchange's trading floor likely would be shut down within one year. Moreover, if the deal gets the green light, the combined marketplace will offer trading of OTC derivatives and regulated futures contracts via a single, ICE-supplied electronic platform.

Within one month, IPE Holdings expects to submit the proposal--which would leave the exchange's management team and regulated exchange status in tact--to its shareholders. The shareholders--who will receive stock in the ICE in return for the current shares they hold in the IPE--will then have a minimum of 21 days to cast their votes for the deal. Then, assuming the merger gets approved, the combined ICE/IPE market would begin the process of transitioning the IPE's floor-traded contracts to the ICE's trading engine.

"The IPE has some very liquid and well thought of futures contracts. So the goal here is going to be to move those contracts from their analog state to the digital state without upsetting the market. So we want to spend lot of time working with the trading community to make sure that migration is an evolutionary process, not a revolutionary process," says ICE chief executive officer Jeffrey Sprecher. "But, generally speaking, we think the transition to an all-electronic platform will happen over the next one year period."

To date, ICE, launched in May of last year, has made its name in the OTC derivatives market--offering trading of a variety of oil, natural gas, power and metals contracts to roughly 4,000 individuals, representing around 200 companies worldwide. The IPE, on the other hand, has built its reputation via open-outcry-trading of regulated futures and options products--including brent, gas oil and natural gas.

However, in the future, if all goes as planned, the merged ICE/IPE market will be able to offer round-the-clock trading of both OTC derivatives and regulated futures and options via the Internet. "As a trader, for the first time you'll be able to see cash markets, forward markets, derivatives markets and regulated exchange futures and options, all together on one platform all around the world," says Sprecher.

IPE officials concur that being allied with a technology firm that could offer trading of OTC and regulated products over a single screen is a very appealing component of the proposed merger. "First and foremost, this will give our users access to liquidity in a very broad range of products," says IPE chief executive officer Dr. Richard Ward.

Sir Bob Reid, chairman of the IPE, agrees that the prospect of developing a "global network" for trading both OTC and regulated futures has helped push the deal forward. But he says that the ICE proposal also comes across favorably because it would leave exchange's status as a regulated market, supervised by the Financial Services Authority, untouched. ICE's Sprecher explains that the firm did not want to tinker with IPE's management and/or regulatory structure, because the exchange had built a solid "brand name" in the trading community. Moreover, he says that to leverage the IPE's expertise in building and running a regulated entity, the ICE plans to appoint both Reid and Ward to its board in the wake of the merger.

If the deal with the ICE gets approved, the IPE will complete the final chapter in a long journey. Over the last few years, the IPE has flirted with a handful of potential dance partners. In fact, it seemed to be on the verge of completing a merger with the New York Mercantile Exchange on a couple of different occasions. But those talks eventually died down, and after the IPE became a demutualized exchange in April 2000, it searched for a technology partner with renewed passion. "In the review of our situation at the time, we defined our greatest vulnerability as the failure to put in place an electronic platform. We had seen how in other sectors of the financial markets major players had lost their market virtually overnight by not having such a platform in place. And we were determined that this wouldn't happen to us," says Reid.

With that philosophy in mind, the IPE began its pursuit, eventually narrowing its list of potential merger candidates down from roughly 50 to two--the ICE and the London International Financial Futures and Options Exchange. Simultaneously, Reid says, the IPE got confirmation from its shareholders that they would be in favor of migrating to an all-electronic environment. Then, backed by shareholder support, the IPE asked its two finalists to prepare proposals in which they outlined their respective business and technology plans for a merged company.

While emphasizing that both parties offered "technically acceptable" trading platforms, Reid says that IPE members--after reviewing both bids--"declared, by a very large majority, to proceed with the ICE proposal."

IPE shareholders, in addition to being attracted to the regulatory and technology components of the proposed deal, also are enticed by the financial compensation the ICE has offered, says Reid. "As a purely financial proposition, this is a substantial and attractive offer for our members," he says.

If the proposal is approved, IPE shareholders will receive shares representing approximately 10% of the combined ICE/IPE market. Ward says that shareholders will receive one Class A ICE share and one Class B ICE share for every IPE share they hold. The Class A shares, he says, will represent equity in the merged market, while the Class B Shares will eventually be redeemable for cash. "They will be redeemable for a cash amount equivalent to $67.5 million. But these Class B shares ... can only be redeemed 12 months after the IPE goes fully electronic," says Ward.

In total, there are currently 11.5 million IPE shares in circulation. Under the proposal, IPE shareholders will trade those shares in for an equal amount of ICE shares--50% Class A and 50% Class B. If you add together the A and B shares, says Ward, the total value of the proposed merger is between $75 and $131 million.