Bloomberg News

LME Takeover Bids Mean Most at Stake for Goldman Sachs, UBS

September 28, 2011

(Updates with Metdist in eighth paragraph.)

Sept. 28 (Bloomberg) -- The potential sale of the London Metal Exchange, home to the city’s last open-outcry trading, means Metdist Ltd., Goldman Sachs Group Inc., MF Global (U.K.) Ltd., UBS AG and Sucden Financial Ltd. have the most at stake.

The companies and JPMorgan Chase & Co. are the biggest shareholders in the 134-year-old bourse, according to a filing to the U.K.’s Companies House a year ago. The exchange told members in a notice on Sept. 23 that it had received “several expressions of interest” and would begin a process that may lead to “an acceptable offer for the company being received.”

Metals prices more than tripled in the past decade as demand from emerging markets overwhelmed supplies from mines, attracting a surge of interest from investors. The LME handled a record $11.6 trillion of contracts in copper and other industrial metals last year, compared with $2.5 trillion in 1999. It operates London’s last open-outcry transactions through a 6-meter-wide (20-foot) ring in which traders shout out orders.

“My initial preference would be to remain as an independent exchange, but if the conditions are right, then we would have to consider what would be right for us as a company,” said Michael Overlander, chief executive officer of Sucden. “There are other exchanges which perform very well, but I don’t think any of them come close to offering, or being able to provide, what the LME has.”

Share Classes

The exchange is owned by LME Holdings Ltd., which issues two share classes. There are 12.9 million ordinary shares, which confer ownership and traded at 4.925 pounds ($7.72) in July, according to data on the bourse’s website. There are also 1.34 million B shares, which exchanged hands at 85.425 pounds yesterday. Neither shares trade on an exchange.

Metdist Ltd., a U.K. metals trading company, owns 912,000 ordinary shares, New York-based Goldman 900,000, and MF Global 600,000, according to a filing as of September 2010. UBS Ltd. is registered as holding 550,000 shares and Sucden 362,000. J.P. Morgan Metals Ltd. and J.P. Morgan Securities Ltd. have a combined 550,000 shares, while Metdist Trading Ltd. owns 300,000 shares.

Spokeswomen for Goldman, MF Global, UBS and JPMorgan declined to comment.

Raj Bagri, who was chairman of the LME from 1993 to 2002, is a director of Metdist Ltd. and Metdist Trading Ltd., according to filings with Companies House last year. Apurv Bagri, also named as a director of the two companies in the filings, declined to comment, his office said in an e-mailed response to questions.

Owners of B shares get no dividend and have no right to the profits or assets of the company, according to the articles of association. In the event of a distribution of assets, they are entitled to get the nominal value of the capital paid up on each share. They can’t attend company meetings unless changes to their rights are being considered. It is mandatory for four out of seven categories of membership to own the B shares.

Seven Categories

The bourse is valued at about 160 million pounds, based on the last published price of its closely held shares, Niamh Alexander, an analyst at KBW Inc. in New York, wrote in a report Sept. 23. At the time, the B shares had last traded at 70 pounds. The exchange’s value may be “significantly more” than its 2010 net income of 9.5 million pounds would suggest, according to Ruben Lee, chief executive officer of Oxford Finance Group, a London-based company specializing in financial and commodity markets.

Bidders may include CME Group Inc., the world’s largest futures market, IntercontinentalExchange Inc. and Singapore Exchange Ltd., KBW’s Alexander wrote in her report. Officials from all three exchanges declined to comment. The LME is being advised by U.S. investment bank Moelis & Co.

Metal Prices

The LME Index of six main industrial metals is down 19 percent this year, after more than doubling the previous two years. The gauge prices copper, aluminum, lead, tin, zinc and nickel.

Electronic trading accounted for 52 percent of LME volumes in September 2010, telephone-brokered transactions 27 percent and the remainder went through the ring. Prices used as a benchmark by metals producers, consumers and merchants are established during the second daily ring session.

“The second ring closing prices are used in more than 90 percent of all physical contracts worldwide in copper,” said Herwig Schmidt, head of sales in London at Triland Metals Ltd., one of the 12 companies authorized to trade in the ring. “If you want to change that you will have to work against quite a strong lobby.”

Open-outcry allows brokers to handle larger volumes at the same time, Schmidt said. The simultaneous buying and selling of contracts for different delivery dates can be done faster in the ring than through electronic trading, he said.

“Whoever takes over the LME, the open outcry will shut,” said David Threlkeld, president of Resolved Inc. in Scottsdale, Arizona, who was an LME member until 1990.

Trading Floors

Trading floors were already shut by the International Petroleum Exchange and the London International Financial Futures & Options Exchange. ICE Futures U.S. ended floor trading of commodities including cotton in 2008 after 128 years.

“It certainly would be a shame to see something that has been there for all of its history disappear, if that’s what in fact a prospective buyer would want to do,” Sucden’s Overlander said. “There’s no guarantee that a prospective buyer would want to destroy that level of flexibility. It’s got open outcry, it’s got electronic trading, it’s got telephone trading. Any prospective would probably have to consider the value of preserving those conditions.”

--With assistance from Maria Kolesnikova in London. Editors: Claudia Carpenter, Stuart Wallace

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.


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