CME Bags GreenX - Analyst Blog

CME Group Inc. (CME) recently announced the acquisition of US-based second-largest carbon exchange – GreenX Holdings LLC. This is a significant step toward achieving new scale in the energy market products. However, the terms and pricing of the deal remains undisclosed.

Formed in 2008, GreenX provides novel futures and options contracts for environmental markets in an attempt to reduce emissions of greenhouse gases. Previously, GreenX was held by a syndicate of institutions including CME Group, Constellation Energy, Credit Suisse AG (CS), Evolution Markets, Goldman Sachs Group Inc. (GS), ICAP Energy, J.P. Ventures Energy Corporation, Morgan Stanley (MS), RNK Capital, Spectron, TFS Energy of TFS Financial Corp. (TFSL), Tudor Investment Corporation and Vitol SA. Subsequently, CME Group bought the 100% equity interest in GreenX.

Since its inception, GreenX has shown tremendous growth in the environmental market and expanded its market share by leaps, decently justifying for its market-leading position. This is also reflected by its volumes that grew by a massive 332% in 2011 across all contracts with more than 450,000 contracts traded – equivalent to 450 million tons of CO2.

Hence, the acquisition blends well with CME Group's aim of building a leading position in the rapidly developing energy multipart, where arch rivals such as IntercontinentalExchange Inc. (ICE) and CBOE Holdings Inc. (CBOE) are already nipping the company's competitive leverage. Additionally, the acquisition also helps the company to develop an incentive to cut emissions. On the other hand, the integration with CME Group should also provide GreenX the benefit of availing value-added clearing services and margin offsets.

Meanwhile, CME Group will progressively complete the shift of the contracts and open interest from GreenX to its own product portfolio. Gradually, these contracts will be traded and cleared on CME Globex and CME ClearPort along with existing contracts. Although expenses and costs related to the acquisition are likely to weigh on the results for some time, we believe CME Group's capital adequacy and fair liquidity should sufficiently cushion the financial impact.

Overall, we believe such attempts to promote, expand and cross-sell its core exchange-traded business, amid regulatory challenges, through strategic alliances, newer product initiatives along with its global presence, would expectedly boost CME Group's diverse derivative-product line in the long run.

Hence, CME Group currently has a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral recommendation.