HKEx in deal to buy LME for HK$16.6b

PUBLISHED : Saturday, 16 June, 2012, 12:00am
UPDATED : Saturday, 16 June, 2012, 12:00am


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Hong Kong Exchanges and Clearing has agreed to pay GBP1.39 billion (HK$16.67 billion) for the London Metal Exchange, the world's largest metals marketplace, marking the local bourse's first overseas acquisition.

The price represents 180 times LME's profit last year of GBP7.68 million, which is too high, according to Hong Kong brokers, who are shareholders in local exchange.

But local government officials threw their weight behind the deal because they say it helps achieve the city's plan to develop commodities trading as part of the mainland's 12th five-year plan. The government is the largest single shareholder of the HKEx, holding a 5.88 per cent stake.

Charles Li Xiaojia, the exchange's chief executive, yesterday afternoon announced that an agreement has been signed with LME directors. The deal is subject to the approval of LME shareholders, who are set to vote before the end of July. It also needs British financial regulatory approval, with the whole process expected to be completed in the fourth quarter.

Li described the deal as a milestone to turn the local exchange into 'a real international bourse operator'' and said it is a major step towards diversifying its business from equities to commodities trading. In January Li said he wanted the exchange to be less dependent on equities trading and develop into a commodities market.

'We should not look at the acquisition price based on the past record of the LME as right now it is an exchange owned by its members and not aimed at making a profit,'' Li said in an interview. 'After the acquisition, the LME will be restructured and reformed as a profit-making entity' and deliver profit in the third year.

'The price is to pay for a future strong growth story,' he added. 'We will use the LME as a platform to expand into international commodities markets, to establish warehouses in mainland China and establish its clearing house services.'

He added: 'We can also launch [yuan] products via the LME platform, which is an important step for the internationalisation [of the currency].'

Li said he believed LME shareholders and British regulator the Financial Services Authority would support the deal because it would help the LME to expand in Asia.

HKEx chairman Chow Chung-kong also said the takeover would allow the local exchange to have a platform for international commodities trading outside China.

The Hong Kong stock exchange was among several bidders for the LME. HKEx finally beat the last rival, Intercontinental Exchange, the second-largest US futures market. The local exchange promised to keep the LME's open outcry system of trading unchanged, and to help the LME expand in China, which has a huge appetite for metals. About 80 per cent of the world's base metal futures are traded on the LME.

The HKEx bid will need to be approved by half of the number of shareholders of LME, as well as holders of at least 75 per cent of shares. JPMorgan Chase, Goldman Sachs Group and family-owned trading firm Metdist are the biggest shareholders. The approval of shareholders in HKEx isn't required. The deal will be financed with cash and bank loans.

LME chief executiveMartin Abbott said in a statement that the deal would support the 135-year old exchange's expansion in Asia, and would help the LME to establish its own clearing houses because the Hong Kong exchange already has three clearing houses.

'This proposed combination will secure the future of the LME for its next 135 years,' said Abbott. 'The LME's global benchmarks plus HKEx's pre-eminent market position in Asia, its IT and trading resources and clearing expertise will cement the LME's position as the world's foremost base-metal trading venue.'

Hong Kong Exchanges, which is itself listed, has seen its share price decline 9.4 per cent this year, and the LME deal will push it lower, according to Jojo Choy Sze-chung, chairman of the Institute of Securities Dealers.

'The HKEx is paying a high price for the deal and it will need to issue new shares and may reduce dividend payments', which would weigh on the share price, Choy said.

Chim Pui-chung, financial services legislator, said the exchange must explain how it will recoup the high price. 'Many cross-border deals end up with the buyer suffering huge losses. I am afraid the HKEx will suffer the same fate. It has no management understanding of commodities and may find it hard to manage the LME,' Chim said.