JPMorgan Chase & Co. (JPM:US) entered exclusive talks to sell its physical commodities unit to Mercuria Energy Group Ltd. as the bank seeks to end a five-year foray into owning and storing materials such as metals and oil, according to two people briefed on the matter.
The bid from Geneva-based Mercuria beat offers from Macquarie Group Ltd. (MQG) and Blackstone Group LP (BX:US), said one person, who asked not to be identified because the discussions are private. Blythe Masters, JPMorgan’s commodities chief, probably won’t join Mercuria as part of the deal, which is still being negotiated, the person said.
JPMorgan is selling the unit as regulators examine whether catastrophic losses at federally backed banks could endanger the financial system and lawmakers question whether firms have the power to manipulate some prices. The Federal Reserve said in July it might force insured lenders to get out of the business, and New York-based JPMorgan agreed later that month to pay $410 million for claims that it manipulated power markets.
Spokesmen for Mercuria and JPMorgan declined to comment, as did spokesmen for New York-based Blackstone and Sydney-based Macquarie. Reuters reported on the exclusive talks earlier today.
Mercuria, founded in 2004 by former Goldman Sachs Group Inc. traders Marco Dunand and Daniel Jaeggi, is the fourth-largest independent commodity trader. The JPMorgan unit would give Mercuria physical crude, petroleum products, power and natural gas trading portfolios in the U.S. as well as oil infrastructure assets in North America. The business also owns metals warehouses, including Henry Bath & Son Ltd. operations that would complement Mercuria’s metals-trading business.
The JPMorgan business could add $150 million to $200 million in annual net income to Mercuria, one person said, moving the trader closer to profits achieved by larger competitors Vitol Group and Trafigura Beheer BV and ahead of Geneva-based trader Gunvor Group Ltd.
Mercuria, which posted a $343 million profit in 2012 on revenue of $98 billion, has been expanding its non-oil business in the past 18 months to include metals, gas, power and agricultural products. Trading from non-oil commodities now accounts for more than 50 percent of the company’s revenue, Mercuria has said.
Masters, 44, joined New York-based JPMorgan in 1991 after internships at the firm and became known that decade for helping develop credit-default swaps, the derivatives that help investors hedge risks on bonds. She was named to run the commodities business in late 2006.
JPMorgan, the biggest U.S. bank by assets (JPM:US), began its buildup in commodities trading with the 2008 acquisition of Bear Stearns Cos., which included an energy-trading platform. To compete with Goldman Sachs and Morgan Stanley, JPMorgan bought UBS AG’s global agriculture and Canadian commodities units in 2009, and part of commodities trader RBS Sempra in 2010. That deal brought the Henry Bath unit.
Before the acquisitions, JPMorgan missed out on opportunities that enriched rivals, including the 2008 spike in oil prices, because it lacked the infrastructure to store and ship oil and other commodities, Masters told employees during an August 2010 conference call.
Competitors were now scared of JPMorgan, she said at the time. “They’d better be, because this is a platform that’s going to win,” Masters said.
Spurred by complaints from industrial customers, lawmakers held hearings in July on whether banks abused their ownership of raw materials to inflate prices. They also warned that a catastrophe involving a bank-owned supertanker or power plant could jeopardize a lender’s health and leave taxpayers on the hook for a bailout.
A day earlier, the Fed said it was reviewing a decade-old decision that allowed lenders including JPMorgan and Citigroup Inc. into the business because physical commodities were “complementary” to banking. A reversal probably wouldn’t force out Goldman Sachs and Morgan Stanley, which are covered under a separate 1999 law.
JPMorgan announced in July that it was exploring a sale of its physical commodities business, including energy trading. The unit produces $750 million in annual income before compensation costs, people who have seen documents circulated to bidders have said.
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