SUMMARY

CBOE (Chicago Board of Options) IPOreport $292mm IPO; price range $27-$29; $2,783mm market cap

There is a knee jerk reaction that the CBOE IPO will do well because other exchanges have done well in their IPOs. CBOE, however, is a late comer to the IPO market, the segment isn’t acting well, business is flat (except for May, 2010)

Yes, it’s true that CBOE experienced its busiest month since October 2008, the month in which Lehman Brothers collapsed in May, but that volatility can’t be annualized because ‘flash crashes’ & Lehman collapses are unusual events.

At 31 times annualized March quarter earnings (see below) CBOE appears to be fully if not over priced, although notice they are the smallest in terms of market cap (below), which means CBOE may well be a candidate to be acquired.

And the sector stocks are in a recent downtrend, click to see chart

COMPARE & CONTRAST
	IPO Mrkt	Price /	Price /	Price /	Price /	Dividend
annualizing March qtr	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	Yield
CBOE Holdings	$2,873	7.1	31	29.5	8.1	1%
Chicago Merc (CME)	$19,990	7	21	1.0	-2.1	4.6%
Intercntnntl Exch (ICE)	$8,810	8	22	3.5	23.2	0.0%
NYSE Euronext (NYX)	$7,370	15	33	5.9	-8.3	1%
Nasdaq OMX (NDAQ)	$3,960	1	16	0.8	-2.8	0.0%

Source: Google Finance, June 10, 2010

BUSINESS
CBOE was the first organized marketplace for the trading of standardized, listed options on equity securities, but is apparently losing its edge.
BUSINESS IS FLAT (except for the May, 2010)
	2007	2008	2009	March 09qtr	March 10qtr
Total options daily volume	3,763	4,717	4,503	4,477	4,545
. For the quarter ended March 31, 2010, total options contract volume at CBOE was 277.3 million, an increase of 1% as compared with the same period in 2009. . For 2009, total options contract volume at CBOE was 1,134.8 million, a decline of 5% compared with 2008
CBOE’S MARKET SHARE IS DECLINING
2000:: 45% 2009: 31.4% March qtr 2010: 30%
MAY: 32.9% -- market share increased base on increased market volatility (flash crash, etc)
ROYALTY FEES INCREASED
"Royalty fees expense for the three months ended March 31, 2010 was $10.9 million compared with $8.0 million for the same period in 2009, an increase of $2.9 million, or 36.3%.
"This increase is directly related to higher trading volume in CBOE's licensed options products and a fee increase on certain licensed index products for the three months ended March 31, 2010 compared with the same period in 2009.
"Royalty fees represented 10.8% and 8.2% of total operating revenues for the three months ended March 31, 2010 and 2009, respectively."
MARGINS ARE DECLINING
There are a number of factors that have contributed to the decrease in average transaction fee per contract in 2009 compared to 2008. These include:
• Product mix—The decrease in the average transaction fee per contract reflects a shift in the volume mix by product. Indexes and exchange-traded funds accounted for 19.6% and 24.4% and 21.7% and 27.6% of total options contracts in 2009 and 2008, respectively. Since these product categories represent CBOE's highest-margin products, their decline as a percent of total volume contributed to the decrease in the total average transaction fee per contract.
• Premium products—Premium products are those which we believe warrant the same or higher pricing for customer and voluntary professional orders as market-maker, member firm and broker-dealer orders and for all non-public customer transactions. These products include options on all licensed and proprietary index options and futures. Contract volume in premium products declined in 2009 compared with 2008, primarily due to a 13.5% decline in SPX, which accounts for approximately 69.5% of the total index options volume. The decline in SPX volume was offset somewhat by a 28.4% increase in VIX in 2009 compared with 2008. As a percentage of total index revenue for the years ended December 31, 2009 and 2008, SPX and VIX accounted for 74.1% and 12.4%, respectively, and 73.4% and 9.8%, respectively.
• Higher percentage of customer orders—WCBOE generally does not charge exchange members for executing customer orders on the Exchange with the exception of premium products. Generally, an increase in customer orders reduces our average revenue per contract. As a percent of total contracts, customer orders have increased from 38.4% in 2008 to 40.3% in 2009. In addition, as a result of competitive pressures in 2009, CBOE eliminated transaction fees for customer orders of 99 contracts or less in ETFs, as well as Holding Company Depositary Receipts, or HOLDRs.
• Member firm proprietary volumes—member firm proprietary volumes have increased; however, member firms pay a variable rate based on a sliding scale, which decreases as volumes increase. This increase in volume contributed to the overall decrease in average transaction fee per contract.
• Large trade discounts—To encourage large trades, CBOE has a customer large trade discount program in the form of a cap on customer transaction fees, including its premium products
MARGINS COULD DECLINE FURTHER
On April 21, 2010, the SEC published for comment proposed rule amendments that, if adopted as proposed, would place a $0.30 per contract limit on the total access fees that an exchange may charge for the execution of an order against a quotation that is the best bid or best offer of such exchange in a listed option.
If the proposed rule amendments are adopted as proposed, or are adopted in a form substantially similar to that proposed, they would materially reduce transaction fees. A 60-day comment period ends June 21, 2010 after which the SEC will review responses from constituents. CBOE intends to comment on the proposal, seek clarification on omissions and inconsistencies and defend its pricing structure for its premium products.
The results for the three months ended March 31, 2010 were not impacted by the proposed rule amendments.
LEGAL SETTLEMENT FORCES IPO
The Settlement Agreement also requires a cash payment totaling $300 million by CBOE to the Participating Group A Settlement Class Members and the Participating Group B Settlement Class Members to be paid upon the earlier of the completion of CBOE's restructuring transaction or one year after the order approving the Settlement Agreement became final. CBOE considers the payment to be a redemption of claimed ownership interests of CBOE, and, thus, the liability for the payment is accounted for as an equity transaction. As a result of the final resolution of the Delaware Action, CBOE recorded a current liability of $300 million and a reduction of retained earnings of a like amount.
On December 2, 2009, the Delaware Supreme Court approved the Delaware Court's dismissal of all appeals from the order of approval and final judgment and, as a result, the Delaware Court's order of approval and final judgment is final and is no longer subject to appeal
It’s a demutualization into a stock-based company
REASON FOR $25 ESTIMATED IPO PRICE
"We may proceed with the restructuring transaction and the initial public offering without seeking additional member approval only if CBOE Holdings can complete the initial public offering at a price per share before underwriting discount of at least $25. As a result, you should make your decision regarding the restructuring transaction assuming the initial public offering price could be as low as $25 per share."
DIVIDEND POLICY
Intend to pay regular quarterly dividends beginning in the third quarter of 2010. The annual dividend target will be approximately 20% to 30% of the prior year's net income adjusted for unusual items.
EMPLOYEES
As of March 31, 2010, employed 597 individuals. Of these employees, 268 were involved in systems development or operations, 97 were involved in direct support of trading operations and 88 were involved in regulatory activities. The remaining 144 personnel provide marketing, education, financial, legal, administrative and managerial support.
USE OF IPO PROCEEDS
9.6mm shares to buy Class A-1 and Class A-2 stock Shareholders intend to sell 2.1mm shares

CBOE Holdings
option trading markets						Post-IPO shares: 103mm
Chicago, IL	2007	2008	2009	March 09qtr	March 10qtr	IPO Mkt
Revenue ($mm)	$344	$417	$426	$98	$101	Cap (mm)
Royalty fee %	8.4%	8.4%	7.7%	8.2%	10.8%	$2,565
Operating income %	40%	45%	42%	41%	38%	@$25
Profit (loss)	$83.0	$115.0	$106.0	$24	$23
Profit (loss) % of revenue	24.1%	27.6%	24.9%	24.5%	22.8%
Total options daily volume	3,763	4,717	4,503	4,477	4,545
Ave monthly lease rate	5,875	9,695	10,444	10,152	6,079
VALUATION RATIOS
	IPO Mrkt	Price /	Price /	Price /	Price /	% offered
annualizing March qtr	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	in IPO
CBOE Holdings	$2,565	6.3	28	26.3	26.3	11%
SCORECARD	Mgt	Market	Market Do-	Proprie-	Total
1-5, 5 is high		Growth	mination	tary	rating
20 is perfect	2	2	2	1	7

COMPARE & CONTRAST
	IPO Mrkt	Price /	Price /	Price /	Price /	Dividend
annualizing March qtr	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	Yield
CBOE Holdings	$2,873	7.1	31	29.5	8.1	1%
Chicago Merc (CME)	$19,990	7	21	1.0	-2.1	4.6%
Intercntnntl Exch (ICE)	$8,810	8	22	3.5	23.2	0.0%
NYSE Euronext (NYX)	$7,370	15	33	5.9	-8.3	1%
Nasdaq OMX (NDAQ)	$3,960	1	16	0.8	-2.8	0.0%