IntercontinentalExchange Inc. CEO Jeff Sprecher said a proposed acquisition of International Petroleum Exchange PLC, London, could be completed as early as June 1.
ICE, an Atlanta-based internet trading company, and IPE reported April 30 striking a $131 million deal, that if completed, will create one of the world’s largest energy and commodities exchanges with a foot in both an open outcry exchange and the growing electronic trading business.
ICE was founded in March 2000 and offers over-the-counter trading in 110 products in physical as well as cash-settled derivatives based on oil, natural gas, electricity, and metals. IPE’s Brent crude oil contract and gas oil futures contract are widely used in Europe and elsewhere as price benchmarks. The exchange recently added electricity futures contracts and also makes a market in gas.
Sprecher told OGJ Online one of the advantages of the combination is that it will “permit everything to be traded on one screen.” He said a merger will resolve credit and settlement issues and other “structural issues of trading OTC products.”
If UK regulators allow clearing of OTC products, it would offer a significant opportunity to “enhance trading and liquidity in OTC contracts,” according to summary of the offer. Offset margining across the products offered by the two exchanges could offer significant cost savings, it said.
While Enron Corp. dominated on line trade in 2000, new industry consortia like TradeSpark and IntercontinentalExchange are ramping up volume and increasing liquidity for the entire market, said Forester Research Inc., Cambridge, Mass. By 2005, Forrester is predicting the majority of on line trading will occur at just a few sites.
The speed and efficiency of on line trade will also push traders to develop straight-through processing from order capture to contract settlement, said Forrester senior analyst Jim Walker, allowing companies to post real-time profit and loss in a highly volatile market.
Liquidity tends to flow to a limited number of exchanges, and analysts say transaction costs will continue to be a driving force as the business consolidates. ICE estimates OTC metals and energy trading generated $350 million in commissions industry wide in 2000, representing a substantial growth opportunity for the combined company.
Among ICE’s founding members are Continental Power Exchange Inc., Goldman Sachs Group Inc., Morgan Stanley Capital Group Inc., MHC Investment Co., and affiliates of BP PLC, Royal Dutch/Shell Group, and TotalFinaElf SA. Six US power and natural gas companies, including units of American Electric Power Co. Inc., Aquila Inc., El Paso Corp., Duke Energy Corp., Mirant Inc., and Reliant Energy Inc. joined in November.
Although ICE and IPE have overlapping shareholders, Sprecher said it took about a year to convince IPE, which had been on the prowl for a technology partner, to do the deal with ICE. Sprecher said ICE and IPE have worked closely with UK and US regulators to insure they were kept up to date about the plan.
And despite the involvement of big energy companies as ICE owners, Sprecher said, “I don’t run the company for the market makers” but in the “best interest of the market” and the users who now total more than 4,000. He said they will stick with the current structure and management of IPE to ensure an orderly transition to electronic trading.
Sprecher said ICE has done 100,000 trades in the 8 months since the Exchange went live in August 2000, and the business is profitable. Prior to founding ICE, Sprecher had little background in trading. But his interest grew out of developments in California. As president of Western Power Group, which developed independent power facilities, Sprecher became interested in electricity markets and proposed an electronic bid-ask system to the California Public Utilities Commission.
The idea met with less than enthusiastic response, he said. As a power plant owner, he said, he considered it ridiculous to auction power on an hourly basis, one of the requirements under the California restructuring law. He sold the power plant to launch an exchange outside California, buying Continental Power Exchange Inc., ICE’s predecessor in 1997.
Sprecher and his colleagues met with 120 trading firms to pitch their idea, initially convincing the commodities trading arms of Morgan Stanley and Goldman Sachs to back the plan. That was enough to convince other energy and metals trading companies to come on board.
Now, if the IPE acquisition goes through, Sprecher said consideration would be given to an initial public offering by ICE, currently a private concern.