Nymex looks to snap up 10% of Montreal Exchange

From the Globe and Mail:

The New York Mercantile Exchange and the Montreal Exchange announced Wednesday that they have formed “a strategic alliance” that will see Nymex acquire a 10-per-cent stake in the Montreal Exchange. The deal includes plans to establish a joint-venture company, based in Calgary, “to provide the Canadian market with trading and clearing of exchange-traded and over-the-counter crude oil, natural gas and electricity products,” the two exchanges said in a statement.

##NYX,TSX##And the Montreal Gazette adds:

Predictions the Montreal Exchange could be worth a cool $1 billion on the stock market weren’t looking far-fetched yesterday after the New York Mercantile Exchange bought into the company.

Nymex, the world’s leading energy market, has agreed to pay $88 a share to buy a 10-per-cent stake in the ME before it goes public in late March or early April.

Executives of the two exchanges declined in a conference call to say how much money the ME will earn on the transaction. But the exchange’s current share count suggests Nymex is paying about $90 million, putting the value of the ME at just over $900 million.

“It’s safe to say that at the close of the first day of trading it will be above $88, probably well above $88,” said Dundee Securities analyst John Aiken, who predicted in December the ME could be worth $1 billion as a public company.

“This is an absolutely fantastic time to be going public.”

Besides Nymex’s equity stake, the two exchanges have agreed to launch a joint venture in Calgary to trade and clear futures and options contracts – collectively known as derivatives – in crude oil, natural gas and electricity.

ME chief executive officer Luc Bertrand called Nymex “the ultimate partner” for the exchange’s move into energy products, which has been three years in the planning. He added there is a lot of demand in the booming Canadian oil patch for derivative instruments used by companies to hedge energy prices and manage other risks.

The joint venture with the Nymex will first clear over-the-counter, or custom-made, derivatives products and then move into trading exchange-listed products.

“The cost will be minimal, the profits will be swift,” Nymex chairman Richard Schaeffer said of the Calgary operation, which is to be up and running by the spring.

The ME also set the stage for its public listing yesterday by releasing stellar financial results for 2006. Net earnings jumped 64 per cent to $24.8 million while revenue grew 25 per cent to $79.3 million. Trading volume was up 41 per cent.

The ME said it plans to list its shares, after a 3-for-1 split, on the Toronto Stock Exchange. But that was the only good news in yesterday’s announcement for TSX Group Inc., parent of the TSX. Its shares were down $2.32 yesterday, or 4.5 per cent, closing at $49.72 after news of the ME-Nymex alliance.

The new joint venture will compete directly in Calgary with the Natural Gas Exchange, purchased by the TSX in 2004. Energy trading revenue represented 13 per cent of the TSX’s total revenue last year.

More significantly, analysts said the partnership between the ME and Nymex drives a stake through the TSX’s long-held ambition to acquire its smaller Montreal rival.

“The bigger issue is that the TSX and the ME can’t seem to get together and make a partnership,” said CIBC World Markets analyst Stephen Boland. “The ME wouldn’t have done this if it wanted a deal.”

The TSX is anxious to get into the lucrative and fast-growing derivatives business. Boland said the company will now look to purchase a secondary U.S. derivatives exchange, raising the spectre of competing options-and-futures markets in Canada as of 2009.