CME’s Sale of NYMEX Building Could Fund Dividend

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CME Group (NASDAQ:CME) announced this week that it has agreed to sell its NYMEX building to Brookfield Office Properties. The 15-story building will fetch the derivatives exchange operator around $200 million in cash. CME will lease back around 222,000 square-feet space in the building for a term of 15 years, in order to continue its floor trading and support activities from the location. [1] The cash received from the sale is likely to increase CME’s liquidity position, and could be used to fund a special dividend to shareholders at the end of the year.

We have a revised price estimate of around $73 for the company’s stock, which is almost 10% below the current market price.

See our full analysis for CME

The Transaction Has Tax Implications

According to management, the cost basis for CME’s NYMEX building is “fairly low,” which implies that it might have to pay a significant amount of tax on the income. Assuming a 35% statutory tax rate, this means that the company’s tax liability would increase by around $70 million in Q4 2013. The corresponding increment in cash position would then be worth around $130 million. The tax liability could be even higher if we assume that CME’s historical tax rate would be applicable to the sale. In 2012, its tax rate was around 46%, which implies a tax liability of around $92 million and a corresponding cash increment of just $108 million. The tax rate guidance for 2013, as provided by CME’s management, lies between these two levels, implying a tax liability of $75 million and a net cash inflow of $125 million.

Statutory Tax rate Tax Guidance for 2013 2012 Tax Rate
Tax rate 35% 37.5% 46%
Income from sale $200 $200 $200
Tax liability $70 $75 $92
Increase in Cash $130 $125 $108

A Special Dividend Could Be Possible

CME has been in the process of returning capital to its shareholders in the form of dividends for the past few years. It usually provides this dividend at the end of the calendar year. This year it could utilize the occasion to distribute the cash earned from the sale of NYMEX building as well. Assuming that $125 million in after-tax cash is available for distribution, we estimate that an additional amount of around $0.38 could be distributed per share, which we have included in its cash position.

Other Revenue Might Get Impacted

A portion of CME’s “Other” revenue comes from rental fees earned on its real estate properties. This revenue declined drastically last year due to a $13 million drop in rental income relating to the sale of CME’s CBOT buildings in Chicago in 2012. With the sale of NYMEX finalized, we expect a similar drop in this figure over the coming year, and have modified our projections accordingly.

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Notes:
  1. CME Group Announces Sale of NYMEX Building to Brookfield Office Properties, CME, November 26, 2013 []