Is the CBOE worth more than the NYSE?

CBOE Holdings Inc.'s $339 million initial public offering may give its owners a 166 percent profit as they sell stock at a higher valuation than any of the world's biggest securities exchanges.

The operator of the largest options exchange will offer shares at $27 to $29 each next week, according to regulatory filings and data compiled by Bloomberg. The IPO would almost triple the average value of a member's stake in the Chicago- based company, according to so-called seat sales since 1990. CBOE is at least 53 percent more expensive than NYSE Euronext and Deutsche Boerse AG, based on 2010 profits.

Record derivatives trading and a potential takeover by its competitors will lure buyers to CBOE, according to Chicago-based IPOX Capital Management LLC, which invests in IPOs. Options trading rose almost fivefold in the past decade and the CBOE is the venue for options based on the Standard & Poor's 500 Index and the VIX gauge of U.S. equity volatility.

"The initial valuation looks steep, but that doesn't mean it's not justified," said Josef Schuster, the manager of IPOX Capital's Direxion Long/Short Global IPO Fund who plans to buy the shares. "A premium brand comes at a premium price, and I think that's how they valued this IPO."

The sale will be the first by an American company in two weeks after the European debt crisis prompted at least 24 companies worldwide to postpone or withdraw IPOs since May. New York-based Goldman Sachs Group Inc. is leading CBOE's deal. Schiff Hardin LLP of Chicago provided legal advice.

VIX SurgesThe Chicago Board Options Exchange, now called CBOE, was founded in 1973 as the first venue for trading equity options. It began with products based on 16 companies listed on the New York Stock Exchange and introduced options based on stock indexes in 1983.The CBOE SP 500 Volatility Index, or VIX, which measures how much investors will pay to protect against losses in the SP 500, posted its biggest weekly increase on record last month after the Dow Jones Industrial Average briefly tumbled almost 1,000 points before recouping some of its losses."One of CBOE's best products is the options on the VIX and that's been a lot more in the news in the last month," said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has followed IPOs since 1991. "In a way, the market jitters don't necessarily hurt a company like CBOE."CBOE, which became a for-profit company in 2006, will be the last major U.S. exchange to shift to stock-based ownership.Seat SalesThe company is converting each of its 930 seats into 80,000 Class A shares, accounting for 74.4 million, according to a filing with the Securities and Exchange Commission. Some former members of the Chicago Board of Trade that helped establish the CBOE will together receive 16.3 million Class B shares. Both Class A and Class B shares become common stock.About 2.09 million of those shares will be offered in CBOE's 11.7 million share sale. The remaining stakes held by owners can't be sold to the public for 180 days to 360 days.The cost of a CBOE seat in the past two decades has been as low as $131,500 in August 2002 and as high as $3.3 million in June 2008, data compiled by the CBOE and Bloomberg show. At 80,000 shares a seat, the per-share expense has ranged from $1.64 to $41.25 and averaged $10.89.That means the initial sale will hand owners an immediate paper gain of 166 percent on average if the exchange convinces IPO buyers to pay the high-end price of $29 a share.'Pretty Darn Well'That's in addition to the $100,000-a-seat payout each CBOE member will receive before the IPO, which will cost the exchange about $113.4 million. The expense exceeds the amount the company earned in all of 2009, data compiled by Bloomberg show."We're going to make out pretty darn well," said Lawrence Goldstein, the Larchmont, New York-based general partner at Santa Monica Partners LP, which oversees about $200 million and is a CBOE seatholder. "I expected they would go public. That's why I bought seats. I've been doing that with all exchanges."Goldstein, who owns shares of 16 publicly traded securities exchanges, will not be selling his CBOE stock in the offering.At the middle of the IPO price range, buyers are paying 21.7 times CBOE's estimated 2010 earnings of $1.29 a share, according to Diego Perfumo, an analyst who covers exchanges at Equity Research Desk LLC in Greenwich, Connecticut.Relative ValueThat's more than the two biggest publicly traded U.S. derivatives exchanges. Chicago-based CME Group Inc., the world's largest futures market, is valued at 18.6 times projected earnings, and IntercontinentalExchange Inc. of Atlanta, the second-biggest U.S. futures market, trades at 20.6 times estimated profit, data compiled by Bloomberg show.CBOE will be the first American company to sell shares in an initial offering since Pasadena, California-based GenMark Diagnostics Inc. on May 28. IPOs have dried up as concern the European debt crisis is spreading beyond Greece and slower-than- estimated U.S. jobs growth in May helped push the SP 500 down 11 percent from its 2010 high on April 23."The IPO market really hasn't been there yet this year," said Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. "You have a company that is a name brand and a viable exchange. But I just don't think people are going to be willing to accept what they perceive to be overpriced."NYSE, Deutsche BoerseCBOE is valued at a premium to New York-based NYSE, which generated 39 percent of its operating profit from derivatives last year, and Deutsche Boerse, part-owner of the International Securities Exchange, CBOE's largest competitor in U.S. equity options. NYSE, the world's biggest equity exchange, is valued at 11.8 times 2010 estimated profit, and Frankfurt-based Deutsche Boerse trades at 14.2 times.CBOE deserves a higher valuation because it's the most widely used platform for options, according to IPOX's Schuster.The bourse, which makes most of its money from trading fees, accounted for 32 percent of options volume in May, when monthly trading reached a record 405.9 million contracts, according to Chicago-based Options Clearing Corp. That's 13 percentage points more than ISE of New York, which had one in every five contracts.CBOE's per-share earnings may climb 22 percent this year on increasing demand for equity derivatives, according to an estimate by Equity Research Desk. That's more than the CME's 19 percent gain and the 13 percent increase for the NYSE, analysts' estimates compiled by Bloomberg show. Deutsche Boerse's profit may decline 9 percent in 2010.Exchange MergersSpeculation CBOE will be acquired may also help attract IPO buyers. The industry had at least $61 billion of acquisitions since 2007, data compiled by Bloomberg show.Nymex Holdings Inc., CBOT Holdings Inc. and International Securities Exchange Holdings Inc. were bought within three years of their IPOs after government regulations boosted competition.CME and ICE are potential suitors, according to Equity Research Desk's Perfumo, who correctly predicted that CME would buy Nymex two years ago. CME spokesman Michael Shore declined to comment, as did ICE's Sarah Stashak and Gail Osten of CBOE."You can't buy shares thinking 'I hope this company gets bought' but it's a nice positive," said Timothy Cunningham, who helps oversee $57 billion at Thornburg Investment Management in Santa Fe, New Mexico. CBOE is "a good company. If you bring a good company at a good price, you can get the deal done."