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Bovespa and BM&F Reach Merger Agreement

Sao Paulo Stock Exchange parent Bovespa Holdings and the Brazilian Mercantile & Futures Exchange (BMF) announced on Tuesday that they have agreed to merge, well ahead of the expiration of the exclusive, 60-day negotiation period the exchanges opened on Feb. 19.

Pending shareholder and regulatory approval, BM&F and Bovespa will each own 50 percent of the combined company--called the New Exchange, for the time being. Bovespa shareholders will also receive 1.24 billion reais ($717 million). The exchanges anticipate operational savings of up to 25 percent by 2010.

Until a transition committee names a CEO and chairman, which is expected to happen within 60 days of the deal’s completion, Gilberto Mifano and Edemir Pinto--Bovespa’s and BM&F’s chief executives, respectively--will be co-CEOs of the new company. The committee is comprised of the two CEOs as well as BM&F chairman Manoel Felix Cintra Neto and Bovespa chairman Raymundo Magliano Filho.

The deal “mirrors what has been happening in the global exchange consolidation game, where exchanges are trying to grow their market presence both domestically and globally by combining with other exchanges that could add to their list of products that they support,” said Sang Lee, managing partner at Boston-based research firm Aite Group. Noting that BM&F is “a major player in the derivatives market globally--and a dominating one in Latin America” and that Bovespa owns and operates the region’s largest stock market, Lee called the combined entity “a formidable force.”

Bovespa, which went public in October, had a market capitalization last month of 2.4 trillion reais ($1.39 trillion), up from 2.3 trillion in January.

On Feb. 28, CME Group finalized a deal with BM&F, announced in October, in which the parent of the Chicago Mercantile Exchange and Chicago Board Options Exchange acquired a 10 percent stake of Latin America’s largest derivatives exchange and BM&F received 2.2 percent of CME Group. Following the merger, CME will own 5 percent of the New Exchange.

Calling Brazil an important part of CME’s global expansion plans, CEO Craig Donohue noted at the time that “the agreement involves not only a cross investment, but also access to all of our markets. Taking into account the size of the Brazilian economy, the impressive GDP rates, and the already strong existence of well-developed capital formation, this partnership represents one of the most important investment opportunities for CME.”

“We will speed our access to international markets and investors,” added BM&F’s Neto. “The consolidation of the derivatives market around the world is going through mergers and associations. BM&F wants to become the liquidity center for Latin America, and this falls within the scope of the agreement.”

Said Aite’s Lee, “Anything is possible in terms of future consolidation involving the CME Group, but in the short to medium-term, the new exchange formed by BM&F and Bovespa will be the most dominating exchange in Latin America, with clear aspirations for a much larger presence globally.”

BM&F, which went public in November and is the fourth-largest derivatives market in the world, traded 426.3 million contracts last year, up 50.4 percent from 2006, and its average daily volume grew 51 percent, to 1.7 million. Interest rate, foreign exchange and index products rose 30 percent.

“Electronification of products, focus on integration, and cost reduction--these are the three pillars that will sustain the company’s growth in 2008,” said Pinto at a press conference.

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