Hong Kong Exchanges Clinches Pact to Buy LME for GBP1.388 Billion
06/15/2012| 06:47am US/Eastern
-- Hong Kong Exchanges & Clearing buying London Metal Exchange for GBP1.388 billion
-- Deal will gain city's stock exchange instant entry into commodities trading amid China's growing appetite for metals
-- HKEx will pay in cash and GBP1.1 billion in loans
-- Acquisition expected to be completed in the fourth quarter
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By Nisha Gopalan
HONG KONG--Hong Kong Exchanges & Clearing Ltd. (0388.HK) said Friday it has entered into a deal to buy the London Metal Exchange for 1.388 billion pounds sterling (US$2.15 billion), giving the city's stock exchange instant entry into commodities trading amid China's growing appetite for metals.
It muscled out shortlisted IntercontinentalExchange Inc. (>> IntercontinentalExchange, Inc.) as the allure of China swung the balance. But the deal still awaits approval from the U.K.'s Financial Services Authority and shareholders representing at least 75% of LME's ordinary shares.
"The deal could immediately prop up HKEx to become one of the major global metals and commodities exchange," Hong Kong Exchanges Chief Executive Charles Li said.
"It allows us to offer products beyond traditional equities derivatives trading, to currencies, fixed income and commodities. It will bring all-round development for the exchange."
The offer, valuing the London-based member-owned exchange at GBP107.60 per share, will be financed with cash and GBP1.1 billion in bank loans. LME accounts for 80% of trade in non-ferrous metals such as copper and aluminum, as well as other industrial metals.
The acquisition for Europe's last open outcry exchange is expected to be completed in the fourth quarter of the year and will be earnings enhancing in the third year after the deal closes, Hong Kong Exchanges said. The exchange said it intends to keep the LME's current business model and the iconic open outcry trading set up.
Earlier bidders for LME before ICE and Hong Kong Exchanges were CME Group Inc and NYSE Liffe, the London-headquartered derivatives arm of NYSE Euronext.
For Hong Kong Exchanges, the GBP1.388 billion bet on commodities is a major reversal of strategy for the market that had led the world in initial public offerings for the past three years but is lagging far behind rivals this year.
The strategy shift dates back to early 2011 when the exchange, still smarting from a drought in trading during the financial crisis, decided to cut its dependence on stocks and consider expanding into commodities trading.
Officials at the exchange, which made its name doing stock offerings for China's giant state-owned companies, believed that it could go beyond its role as a conduit for capital for mainland businesses and could fill the country's industrial needs as well.
Soon after the decision, the LME came on the market and Hong Kong Exchanges quickly bid. The offer, its first ever for a rival exchange, put it on the short list.
"HKEx's cash equities market has grown to the point where incremental listings and other new products have a limited ability to drive revenue growth," said Sam Hilton, a Hong Kong-based analyst at US brokerage Keefe, Bruyette & Woods. The exchange needed a new asset class that could drive trading, so when LME came up for sale, it made an "opportunistic" bid, he said.
Driving the shift towards commodities is CEO Mr. Li, a former JPMorgan banker and ex-journalist who joined the bourse in late 2009. He surprised the market in January when he said commodities could offer the best growth opportunities, along with alliances with Chinese stock exchanges, which had been the exchange's long-time strategy.
Like the exchange he is hoping to reshape, Beijing-born Mr. Li has a history of reinvention. He worked on an oil rig, as an editor at mainland newspaper China Daily, then got a law degree and went to Wall Street where he led the ultimately aborted $18 billion bid by China's Cnooc Ltd. for U.S. oil producer Unocal Corp. in 2005.
The move into commodities comes after Mr. Li's other main initiative--getting listings from foreign companies--has had mixed success. Hong Kong Exchanges has been home to listings such as United Co. Rusal in 2010 and Italian luxury house Prada SpA last year, but many of the stocks have performed poorly and trading volume has remained low. Jeweler Graff Diamonds Corp. pulled its $1 billion IPO last month.
Hong Kong Exchanges is now ranked sixth in IPOs globally this year, behind Nasdaq Stock Market, the New York Stock Exchange, and even the Shanghai stock exchange, according to Dealogic.
The bid for the LME put Hong Kong Exchanges into competition with established commodity players such as the Chicago Mercantile Exchange and the Intercontinental Exchange, which was the last bidder left in the auction.
Adding to the credibility of its bid, the exchange in the last year has hired a chief financial officer from commodities trader Noble Group Ltd., a former top official from China's Securities Regulatory Commission and a former CME executive.
Hong Kong made the case that it could boost the LME's business in China, which accounts for 40% of the world's demand in metals, but just a fifth of LME's revenue.
China has three futures exchanges, but just one dealing in nonferrous metals, the retail-focused Shanghai Futures Exchange, which is denominated in yuan, and not the currency of global commodities trade, the U.S. dollar.
Still, "given competing metals contracts from the Shanghai Futures Exchange, HKEx's ability to accelerate the China market opening process on behalf of LME, while better than LME's, may be limited," said Keefe, Bruyette & Woods' Hilton.
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