Intercontinental Exchange Inc. (ICE:US) and Hong Kong Exchanges & Clearing Ltd. pledged to keep the London Metal Exchange and its trading floor in the U.K. capital in their separate takeover proposals to the LME’s board, said two people with direct knowledge of the bids.
The LME’s board met yesterday to review the offers, said the people, who declined to be identified because the details are still confidential. ICE, the second-largest U.S. futures market, and Hong Kong Exchanges, the world’s second-biggest exchange by market value, are the remaining contenders for the LME, which handles more than 80 percent of global trade in industrial metals futures. A possible takeover was announced last September when the LME said it had received “several expressions of interest.”
Both bidders are willing to keep the LME’s headquarters in London, its own board, its system of establishing metals prices and network of warehouses, said the two people, who declined to be identified because the information isn’t public.
Scott Sapp, a spokesman for the Hong Kong bourse, Brookly McLaughlin, an ICE spokeswoman in Chicago, and Miriam Heywood, a spokeswoman for the LME, declined to comment.
Hong Kong Exchanges would build a clearinghouse in London for the LME and the Atlanta-based ICE would move clearing of metals contracts onto ICE Clear Europe, the people said.
The LME handled a record $15.4 trillion in contracts last year when profit declined 19 percent to 7.68 million pounds ($11.8 million) on investments in a clearinghouse and updating electronic trading. The LME will sell for more than its valuation of about $1.3 billion, according to Equity Research Desk, an adviser to hedge funds in Greenwich, Connecticut.
The 135-year-old exchange operates London’s last open- outcry transactions through a 6-meter-wide (20-foot) ring in which traders from 12 entitled companies shout out orders. It also transacts metals by phone and electronically.
The exchange is considered a so-called terminal market because trading may result in a physical delivery of metals. Contracts can be settled on a daily, weekly or monthly basis in contrast to a monthly settlement of contracts on other futures exchanges. The LME Index of six industrial metals has dropped 2.7 percent this year after falling 22 percent last year.
Some LME shareholders are also getting access to details on the offers, two people who declined to be identified said.
“It’s a package deal, and we’ll have to assess any proposal on its merits,” said Jonathan Whitehead, the global head of commodities markets at Societe Generale SA, which owns 300,000 shares in the LME. “We have a business that has been built around the structure of the exchange. The value of the shares is immaterial compared to the potential impact on our and their business.”
Hong Kong Promise
Hong Kong has told the LME that it can help the bourse expand in China, one person with direct knowledge of the matter said. The LME licenses more than 600 warehouses for metal in locations including the U.S., Netherlands, Singapore and Italy. It wants to expand the network into China, the world’s largest consumer of metals, LME Chief Executive Officer Martin Abbott said May 4.
Hong Kong Exchanges’ bid may beat ICE’s because it could help LME get warehouses approved in China, said Harsh Wardhan Modi, an analyst at JPMorgan Chase & Co. in a report yesterday.
JPMorgan is the LME’s biggest shareholder, with almost an 11 percent stake, according to information on the LME’s website. Patrick Burton, a spokesman for JPMorgan in London, said Modi’s comments don’t reflect JPMorgan’s view as a shareholder.
The LME would be the 12th acquisition for the Atlanta-based exchange in the past 10 years and the first overseas takeover for the Hong Kong Exchanges. ICE bought the International Petroleum Exchange, home of Brent crude oil futures, in 2001 and the New York Board of Trade in 2007 for $1.79 billion, gaining contracts in coffee, cocoa and sugar.
Trading on Nybot doubled since the acquisition and trading on ICE Futures Europe, formerly IPE, rose more than sixfold between 2005 and 2011. ICE Futures Europe and Nybot have their own boards.
“ICE is a natural candidate from a strategic position,” said Alex Kramm, an analyst at UBS AG in New York. “ICE has a history of doing deals that are a little bit more outside of the box. They have never shied away of doing complex transactions.”
Any bid would have to be approved by more than 50 percent of shareholders, with the owners of at least 75 percent of shares backing the move. The exchange is owned by more than 60 of its 94 members. There are 12.9 million shares which confer ownership and voting rights. JPMorgan, Goldman Sachs Group Inc. and family-owned trading firm Metdist Ltd. have the biggest stakes.
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