By Noor Zainab Hussain and Sinead Cruise
LONDON (Reuters) - U.S. exchange operator CME Group has made a $5.5 billion (3.9 billion pounds) offer to buy NEX Group to create a cross-border powerhouse for investors trading in the multi-trillion dollar foreign exchange and government debt markets.
Shareholders in NEX, a financial technology firm that matches buyers and sellers of bonds, swaps and currencies, will receive 500 pence in cash for each NEX share and 0.0444 new CME shares. Each NEX share would be valued at 1,000 pence, CME said.
The offer by CME, one of the world's biggest exchange groups and owner of the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange, represents a 2.9 percent premium to Wednesday's share close of 972 pence.
A union of the two firms would enable investors to access cash and futures trading and over-the-counter services via one provider for the first time, improving access to markets, NEX's founder and Chief Executive Michael Spencer said in a statement.
CME Chairman and CEO Terry Duffy said the new entity would help investors lower trading expenses and better manage risk.
Analysts said CME may have been prompted to bid now to avoid losing out to a rival, as global exchanges face rising competition for business amid shrinking trade volumes.
"This is a good price," Liberum analyst Justin Bates said, but added that the 50 percent cash component might disappoint some investors leaving "the door ajar for a competing offer with a higher cash component."
He said potential bidders could include ICE, Deutsche Boerse (DE:DB1Gn) and London Stock Exchange (LSE) (LSE), with ICE the most likely frontrunner.
The stock was trading below the offer price at 968 pence at 1020 GMT on Thursday, after climbing 30 percent in 2017.
The takeover could spook regulators concerned about the potential dominance of a new entity in some markets, especially U.S. government debt, where CME is already in the top position.
Previous major exchange mergers, such as the one between the LSE and Deutsche Boerse, have hit antitrust buffers in recent years.
NEX provides foreign exchange and fixed income trading technology via its EBS and BrokerTec platforms.
EBS, a foreign exchange matching platform, allows banks and other major institutions to trade the euro, yen and Swiss franc against the dollar, connecting buyers and sellers of currencies in more than 50 countries.
BrokerTec is the market leader for electronic trading in many U.S and European fixed income products, including U.S. Treasuries, European Government Bonds and European Repo.
"It's a company that has always been ripe for acquisition," Matthew Page, fund manager at Guinness Asset Management and one of NEX's 25 largest investors, told Reuters, adding CME probably thought "they’ve got to make a move for it now or it might get snapped up by someone else."
(GRAPHIC - Brexit volatility kick-starts NEX share rally: https://reut.rs/2pMWOvc)
The deal would expand CME's international footprint in Europe, the Middle East and Africa and Asia Pacific, CME said, adding it expected the acquisition to generate run rate cost savings of $200 million by the end of 2021.
CME said the deal would add to its cash adjusted earnings per share from 2019, with a one-time cash cost of $285 million.
After the deal, Spencer would join CME's board and become a special adviser to the firm, CME said.
Spencer is a high-profile figure in London's financial industry who previously served as treasurer for Britain's ruling conservative party. NEX Group was known as ICAP (LON:NXGN) before the sale of its voice-broking business to TP ICAP in 2016.
NEX's directors intended to recommend the offer to shareholders, the exchange operator added.
"CME's decision to choose London as its European headquarters is also a signal of tremendous support for Britain's financial services sector," Spencer said.
The combined headquarters will be in Chicago.
NEX, which has picked Amsterdam as its European Union hub after Britain leaves the bloc, said last month its markets had been more active in 2018 as forex volatility rose from historic lows. Spencer said potential interest rate rises were expected to boost volumes further.