Hong Kong Exchanges Bid for LME Beats out ICE

[REO 54]

Hong Kong Exchanges & Clearing Ltd., host to the world’s fifth-largest equity market, agreed to pay 1.39 billion pounds ($2.15 billion) for the London Metal Exchange, which handles more than 80 percent of global trade in industrial-metal futures.

LME investors will get 107.60 pounds per ordinary share in cash, with a vote scheduled before the end of next month, the bourses said today. The stock traded at 4.925 pounds in July 2011, before the LME said it was considering bids. JPMorgan Chase & Co., Goldman Sachs Group Inc. and closely held Metdist Ltd. are the biggest LME shareholders.

Hong Kong is the only place in China where investors can freely buy and sell shares in Industrial & Commercial Bank of China Ltd., the biggest lender by value, and PetroChina Co., Asia’s largest company. The deal would be Hong Kong Exchanges’ first overseas acquisition. The 135-year-old LME sets global benchmark prices for metals including copper, aluminum and nickel, of which China consumes more than any other nation. Its network of warehouses doesn’t currently extend into the country.

“Hong Kong Exchanges can be positive for LME if it can enhance its China exposure,” said Jonas Kan, the head of Hong Kong research at Daiwa Capital Markets. “HKEx has a clearing business, visibility in listing for Chinese companies, and has experience working with regulators and authorities in China, which can add value to the LME.”

Morning Post
Buying the LME would give Hong Kong Exchanges its first commodities contracts. Shares of Hong Kong Exchanges retreated 23 percent since the South China Morning Post reported its bid Feb. 18. That compares with a 15 percent drop in the Bloomberg World Exchanges Index. (BNWEXCH) Hong Kong Exchanges is paying with existing cash and new loans of at least 1.1 billion pounds.

Shares of Hong Kong Exchanges declined 9.4 percent this year, valuing the company at $15.66 billion. Its net income fell 7 percent in the first quarter as listing fees declined. Hong Kong Exchanges recently lost its rank as the world’s most valuable exchange company to CME Group Inc.

The Chinese city’s bourse wants to expand its product base as the pipeline of large initial public offerings from China dries up. Hong Kong has hosted $3.2 billion in IPOs this year, compared with $9.8 billion in the comparable period in 2011, according to data compiled by Bloomberg.

LME Directors
“I’m skeptical about the deal,” said Andrew Sullivan, principal trader at Piper Jaffray Asia Securities Ltd. in Hong Kong. “They want to build up the bourse and expand into other areas. They’re spending a lot of money at a time they’re not getting an awful lot of income. You won’t see the synergy straight away.”

The LME reported a 19 percent drop in net income to 7.68 million pounds last year, even as revenue climbed 21 percent to 61.2 million pounds.

The offer will be recommended by all the LME’s directors and sent to investors within 15 business days, with a meeting held before the end of July. It will need approval by more than 50 percent of LME shareholders, with the owners of at least 75 percent of the stock backing the move. The LME is owned by more than 60 of its 94 members.

The takeover, which needs the approval of the U.K.’s Financial Services Authority, may be completed in the fourth quarter. Both sides agreed to break fees of 25 million pounds to 30 million pounds depending on the circumstances.

Intercontinental Exchange Inc. (ICE), the second-largest U.S. futures market, and Hong Kong Exchanges were the two parties left in a bidding process announced by the LME in September. Claire Miller, a spokeswoman for ICE in London, declined to comment. The LME said today it would no longer be seeking competing takeover offers.

Open Outcry
Hong Kong Exchanges pledged to maintain the LME’s contracts and ring, host to London’s last open-outcry trading. The bourse will continue to be based in London and regulated by the FSA. The Asian exchange also said it would keep the LME’s existing warehousing network, help the bourse develop its own clearing house and freeze trading fees until at least the start of 2015.

The transaction will help the distribution of LME data across Asia and increase the number of customers in mainland China, the London bourse said. Hong Kong Exchanges will also support the expansion of the LME’s warehousing network, which currently consists of more than 600 storage points.

The LME’s board after a takeover would consist of nine directors. Seven of those will have non-executive roles, with two of them chosen from Hong Kong Exchanges’ management. The bourse handled a record $15.4 trillion of contracts last year.
Hong Kong Exchanges is being advised by UBS AG and N.M. Rothschild & Sons Ltd. while the LME hired Moelis & Co.

To contact the reporters on this story: Stanley James in Hong Kong at sjames8@bloomberg.net; Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

[Ragnarok]

Why can't I help but think whatever physical PMs the LME has or has control over will soon be shipped to China?
Will China now set/control/manipulate PM prices? I feel something big has happened, a game-changer, but I can't quite put my finger on it. Guess we'll just have to see how it plays out.

R.

[Gcubed]

Why can't I help but think whatever physical PMs the LME has or has control over will soon be shipped to China?
Will China now set/control/manipulate PM prices? I feel something big has happened, a game-changer, but I can't quite put my finger on it. Guess we'll just have to see how it plays out.

R.

You are confusing the LME with the LBMA. They are two different animals.

[REO 54]

You are confusing the LME with the LBMA. They are two different animals.

Yes they are,but I still agree with Ragnarok.Something big is definately afoot behind that "curtain"

[Gcubed]

Yes they are,but I still agree with Ragnarok.Something big is definately afoot behind the the "curtain"

There is a huge economy behind that "curtain". It will soon be bigger than ours. Guess where the major markets for LME commodities will be.

[REO 54]

....update..

Hong Kong LME Bid Faces Regulator as $32 Billion in Deals Killed


Hong Kong Exchanges & Clearing Ltd.’s bid for the London Metal Exchange, the most expensive bourse merger over $1 billion, may succeed in gaining the approval of regulators who’ve scuttled $32 billion of similar cross-border deals.

Hong Kong’s offer of 107.6 pounds a share, or 180 times LME’s 2011 net income, requires approvals from LME’s shareholders and the U.K. Financial Services Authority. It doesn’t need shareholder approval in Hong Kong, where the local bourse operator’s stock fell 23 percent since Feb. 18, when the South China Morning Post first reported the bid. The Bloomberg World Exchanges Index (BNWEXCH) has dropped 14 percent in that time.

The takeover would give Hong Kong control of a business that sets global prices for base metals, while LME stands to gain greater access to China, the biggest consumer of metals including nickel, aluminum and copper. The London bourse will remain under the watch of the FSA, meaning the deal may avoid national interest and market power concerns that prompted market regulators and politicians to block other exchange mergers.

“There’s a much lower level of political concern about the LME than there would be about the takeover of the London Stock Exchange,” said Ruben Lee, chief executive officer of Oxford Finance Group, a London company specializing in financial and commodity markets. “U.K. regulators will maintain their control over the operations of the exchange. There will be concern about the fitness and the properness of any new owner, but I’m sure that Hong Kong Exchanges & Clearing are going to satisfy that.”

Shareholder Vote
LME shareholders, led by JPMorgan Chase & Co., Goldman Sachs Group Inc. and closely held Metdist Ltd., are expected to vote on the offer by the end of July. If they approve it, the transaction will be reviewed by the FSA. The regulator has three months to consider a completed application from a buyer once it’s received, according to Joseph Eyre, a spokesman for the FSA in London.

The FSA’s sole concern is that Hong Kong Exchanges doesn’t “pose a threat to the sound and prudent management” of the markets operated by the LME, according to the regulator’s handbook. While there are no fixed criteria for the review, the regulator will consider the financial soundness of the bidder and the influence the new owner may exert, David Blair, head of financial regulation at Osborne Clarke, a law firm, in London said by e-mail June 15.

“The FSA will obviously want to understand the change of ownership and more about the new owners of the exchange,” Niki Beattie, chief executive officer of Market Structure Partners Ltd., a London-based consulting firm, and a former managing director at Merrill Lynch & Co., said in a phone interview. “If, as they say they will, HKEx continues to operate the same model for the time being, there is unlikely to be further scrutiny of the model.”

Deals Blocked
Singapore Exchange Ltd’s $8.3 billion bid for Sydney-based ASX Ltd. was blocked in April 2011 by Australia’s government on national interest grounds. The European Commission vetoed NYSE Euronext (NYX)’s $9.53 billion sale to Deutsche Boerse on Feb. 1, saying the deal to create the world’s biggest bourse owner would have led to a “near-monopoly” in European exchange-traded derivatives.

“This is different from NYSE-Deutsche Boerse or ASX-SGX mergers,” said Diego Perfumo, an exchanges analyst at Equity Research Desk in Greenwich, Connecticut, who has been analyzing exchanges for 12 years. “You have a global market of metals that doesn’t affect directly the economy of the U.K. The FSA will have the last word. That should give confidence to any market participant that there won’t be manipulation.”

Most Expensive
The Office of Fair Trading doesn’t have an open investigation into the London Metal Exchange acquisition, said Frank Shepherd, a spokesman in London.

At 180 times trailing net income, Hong Kong Exchanges’ bid is the most expensive of any bourse deal above $1 billion since at least 2000, according to data compiled by Bloomberg. The next highest multiple was 66 times net income paid for CBOT Holdings Inc. in 2007 by CME Group Inc. (CME) Chicago-based CME overtook Hong Kong Exchanges as the world’s biggest exchange operator by market value earlier this year.

LME’s fees have historically been kept low to benefit members, according to Hong Kong Exchanges’ offer document. A fee increase to take effect in July would have tripled profit had it been in place during 2011, according to the document. Hong Kong Exchanges said as part of the bid that it won’t increase fees until at least January 2015.

The bid price is almost 22 times the 4.925 pounds that LME stock last changed hands for in July last year, before the bid process began.

‘Cash Injection’
“The major approval they need is from shareholders, that’s the first hurdle they need to clear,” said Gurjit Kambo, a London-based analyst at Credit Suisse AG, by phone June 15. “At the moment as a shareholder you have much more control over what the LME will charge you, and that could change. They will have to make a tradeoff in terms of getting a cash injection versus potentially losing out in terms of higher fees.”

Hong Kong Exchanges doesn’t need shareholder approval for the deal, Henry Law, the bourse’s head of corporate communications said by phone. At 1.39 billion pounds ($2.17 billion), it’s worth less than 25 percent of the bourse’s $15.66 billion market value, meaning it’s merely a “disclosable” transaction under the city’s listing rules.

Hong Kong is the only place in China where investors can freely buy and sell shares in Industrial & Commercial Bank of China Ltd., the biggest lender by value, and PetroChina Co., Asia’s largest company. The deal would be Hong Kong Exchanges’ first overseas acquisition. The 135-year-old LME’s network of warehouses doesn’t currently extend into China, the biggest consumer of the metals it trades.

“Hong Kong is very much known for its link to China and its initial public offerings in equities, so this is a very smart way to diversify their revenues,” Simmy Grewal, London- based senior analyst at Aite Group LLC, said in a phone interview. “The fact that Hong Kong doesn’t have experience in commodities is a plus. They’ll let the LME do the job since they are the experts. That’s what’s needed for this deal.”

To contact the reporters on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net; Maria Kolesnikova in London at mkolesnikova@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

http://www.bloomberg.com/news/2012-0...ls-killed.html

[southfork]

Wonder if the deal still goes thru after the chicoms do their due diligence on the deal and find out how little physical they really have, I hope the assay all the metals.

[REO 54]

Wonder if the deal still goes thru after the chicoms do their due diligence on the deal and find out how little physical they really have, I hope the assay all the metals.

No doubt! Would'nt you think that they would do that first before signing on the dotted line?? Sheesh,I sure would.