New Exchange will bring together two highly efficient and complementary businesses, coupling the strengths of BOVESPA Holding in cash equities and equity derivatives with those of BM&F in financial and commodity derivatives, spot FX and securities markets. New Exchange will become the world’s third largest exchange and the second largest in the Americas in market value. New Exchange will be Latin America’s leading equity and derivatives markets, representing approximately 80% of the region’s average daily equity turnover and a daily notional futures trading volume of USD67 billion. It will also offer:
One of the world’s broadest product offerings, including the region’s largest equity market and a full set of financial, commodity, equity and OTC derivatives, as well as structured transactions and spot market products;
A fully integrated business model with four clearinghouses for equities, derivatives, securities and spot FX, a complete custody system, as well as its own settlement bank;
A hybrid trading model encompassing floor, electronic and Web trading;
The highest growth profile in the exchange industry.
The resulting entity will capture the attractive macroeconomic and market growth dynamics of Latin America and will strengthen Brazil as a Latin American center for equities and derivatives expertise.
By bringing together the respective knowledgeable and experienced teams of BOVESPA Holding and BM&F, New Exchange will have the resources and scale to develop and successfully market new capital market products and high value data services, as well as to offer an integrated clearing solution to an enlarged and international customer base.
The integration is expected to add significant value to BOVESPA Holding and BM&F shareholders through New Exchange’s enhanced growth profile and opportunity to achieve meaningful synergies. Cost synergies of up to 25% of the combined expenses are targeted. Depending on the closing date, synergies will be partially phased in during 2008, with most of the synergies expected to be achieved in 2009 and 2010. In addition, revenue synergies will be targeted through the development of new trading, clearing and market data products and by leveraging the broader platform across multiple asset classes.
Capital structure and governance of New Exchange
The shareholders of BM&F and BOVESPA Holding will receive common shares of New Exchange at a 50/50 ratio. In addition, the shareholders of BOVESPA Holding will receive BRL1.24 billion in cash.
New Exchange shares will be listed to trade on Novo Mercado. Its Board of Directors will consist of directors appointed by BM&F and BOVESPA Holding in equal number, most of whom will be independent directors.
The boards of directors of the two companies also decided to set up a Transition Committee, which will consist of the chairmen of the boards of directors and the chief executive officers of both companies. This Committee will be in place through December 31, 2008.
The Transition Committee will recommend the new Chairperson and CEO to the Board of Directors of the New Exchange within 60 days after the approval of the transaction at each company’s shareholders meetings.
Until those nominations are presented, the current chairmen of the boards of BM&F and BOVESPA Holding will jointly chair the Board of Directors of New Exchange, whereas the two principal officers of the two companies will act as joint chief executive officers.
The boards of directors of the two companies have authorized their management teams to complete the preparatory actions and measures required for the proposal to be submitted to the shareholders.
Conditions to closing
The transaction is subject to definitive documentation, approval at the shareholders’ meetings of both companies and regulatory approvals.
Advisors
Credit Suisse for BOVESPA Holding and Rothschild for BM&F are acting as financial advisors. Barbosa, Mussnich and Aragão for BOVESPA Holding and Mattos Filho, Veiga Filho, Marrey Jr. and Quiroga law firm, and Nelson Eizirik for BM&F are acting as legal advisors in this transaction.
About BOVESPA Holding
BOVESPA Holding manages the fastest-growing equities and equity derivatives exchange in the Americas and is the third fastest-growing exchange worldwide in terms of average daily trading volume.
BOVESPA Holding operates the only active equity and equity derivatives exchange in Brazil, and it is the largest exchange in Latin America in terms of:
traded share value, with a market share of 71% of the total of all Latin American exchanges in the first six months of 2007;
market capitalization, with approximately 55% of the total market capitalization of all Latin American exchanges as of June 30, 2007; and
value of public equity offerings, with approximately 78% of the total value of all public offerings in Latin American markets in the first six months of 2007.
BOVESPA Holding’s business comprises the entire chain of trading, clearing and settlement, risk management, central counterparty and central depository of securities through integrated and fully electronic systems under the responsibility of the subsidiaries BVSP and CBLC. This structure enables BOVESPA Holding to provide a combination of efficient, streamlined and high quality services, providing it with a competitive edge in the market. As an organized market operator, BOVESPA Holding is responsible for the surveillance and monitoring of its markets and participants.
About BM&F
BM&F is the fourth largest futures exchange in the world and the largest in Latin America. BM&F develops and manages trading and settlement systems. Transactions are carried out via open outcry, electronic, Web-based (where mini futures contracts are traded) trading systems and OTC markets. Exchange-traded products are based on interest rates, foreign exchange rates, equity and inflation indices, coffee, live cattle, soybean, corn, sugar, ethanol, metals, sovereign debt instruments, and environmental products for both immediate and future settlement. BM&F seeks to provide its clients with products that allow them to hedge against risks, arbitrage prices between markets and/or securities, diversify investment allocations and leverage investment strategies.
BM&F had a 50.4% increase in trading volume during 2007, with 426.3 million contracts traded and an open interest of 19.8 million contracts.
The only futures exchange in Brazil, BM&F has a 95% share of the domestic derivatives market.
A vertically integrated model, BM&F has three of the five clearinghouses that are considered systemically important by the Central Bank of Brazil: Derivatives, Foreign Exchange and Securities.
BM&F acts as a central counterparty on the derivatives, FX and securities markets.
The BM&F Settlement Bank has contributed to mitigate the Clearinghouses’ operational risks on a continuous basis, by providing services such as liquidity assistance, access to Central Bank credit facility, and custody. It ended 2007 with a 546% growth in custodial volume over 2006.
BM&F introduced the Operational Qualification Seals, which is a program that qualifies
its brokers for five strategic niches: Agribusiness; Custody and Settlement; Professional
Trading; Corporate Market; and Internet Trading.
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