LME falling into Chinese hands

In another milestone of Britain’s century-long fading as a global power, the 135-year-old, privately held London Metal Exchange — the world’s premier non-ferrous metals market — looks set to be sold off to interests based in its former colony Hong Kong.

Hong Kong Exchanges and Clearing Ltd. (HKEx) is offering LME shareholders £107.60 (US$169.13) in cash per share, or £1.388 billion (US$2.18 billion) based on 12.9 million outstanding shares.

The directors of the LME unanimously support the offer. Shareholders are expected to vote on it in July, and the deal would close in the fourth quarter. HKEx shareholders won’t vote on it.

HKEx says it will fund the purchase with a little cash-on-hand and new bank facilities of at least £1.1 billion (US$1.7 billion) from China Development Bank, Deutsche Bank, HSBC and UBS, all the while retaining its current dividend policy.

The HKEx says the deal brings it several benefits: it combines two leading global exchanges; kick-starts its strategy of expanding into commodity markets; leverages strongly complementary business models; and positions it for continued robust growth.

Boasting 93 members representing globally leading financial institutions, futures brokers and metals traders and producers, the LME is the premier venue in the world for forming and benchmarking base-metal prices. Remarkably, only one LME member is Chinese: the Bank of China’s BOCI Global Commodities (UK) unit, which was only approved as a member in April.

The LME is where you’ll find 80% of all futures and options contracts for aluminum, copper, tin, nickel, zinc, lead aluminum alloy, cobalt and molybdenum, with 147 million lots traded in 2011 totalling US$15.4 trillion in notional value.

The LME also offers the world’s most trusted metal storage network, with 732 LME-approved warehouses across 37 locations in 14 countries. Remarkably again, China is not included on the list of delivery locations, though there are nine in Asia.

The Hong Kong group says it will seek to retain the LME’s current management team and preserve the highly respected LME brand. It also says it will maintain the LME’s “unique business model” — though there are always questions as to when the exchange will forego the boisterous “ring” culture and move to all-electronic trading.

In 2011, the LME saw its revenues grow 21% to £61.2 million and its profits shrink 19% to £7.7 million, with its net assets standing at £76 million. These numbers don’t reflect the LME’s substantial fee increases that will be pushed through in July 2012, though the HKEx has committed to no further fee increases on existing products until at least 2015.

The bidder is describing the LME as having had a “not-for-profit” model from 1877 to 2004, a “profit-constrained” model from 2005 to 2011” and now a “commercial” model from July 2012 onwards.

Overall, the HKEx emphasizes that the acquisition will be a first step to help resolve the problem that China is the leading consumer and producer of base metals, and yet the country lacks efficient hedging and physical trading of base metals. The HKEx intends to give further impetus to commercializing the LME and expand its presence in Asia, such as having Asian time-zone trading and Asian clearing.

“This proposed combination will secure the future of the LME for the next 135 years,” LME chief executive Martin Abbott says in a statement. “It will cement the LME’s position as the world’s foremost base-metal trading venue.”

The LME had been openly looking for a buyer since last September.

During a press conference, HKEx chief executive Charles Li said his group had been one of four serious bidders, and the only one not currently involved in commodities. The other three bidders are widely presumed to be the NYSE Euronext, Intercontinental Exchange and CME Group.

“The LME does not need commodities expertise — they have plenty of it,” Li said. “They need China expertise. They need Asia expertise, and we have plenty of it to offer them.”

The hurdle for the offer’s approval by LME shareholders is a high 75%, and there have been few public statements or hints about voting intentions. So it’s by no means a done deal.

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