HKEx in US$1b placement to finance LME buyout

PUBLISHED : Friday, 30 November, 2012, 10:57am
UPDATED : Friday, 30 November, 2012, 2:32pm

Hong Kong Exchanges & Clearing, the world’s No 2 bourse operator by market value, is selling US$1 billion in new shares to fund its purchase of the London Metal Exchange, approved on Thursday by the British regulator.

The Hong Kong company plans to raise HK$7.75 billion (US$1 billion) selling shares at HK$118 each, a 5.5 per cent discount to Thursday’s closing price of HK$124.80, according to a statement from the bourse today.

Deutsche Bank, HSBC and UBS will manage the sales, it said. The exchange sold US$500 million in convertible bonds in September for the deal. They have an initial conversion price of HK$160 a share. The stock fell 1.5 per cent to HK$122.90 at 9:42am (HK time) on Friday.

The Financial Services Agency yesterday approved Hong Kong’s takeover of the LME, which handles more than 80 per cent of metals trading. Hong Kong Exchanges, which lost its place as the world’s biggest exchange operator by market value to CME Group, is seeking to broaden its business as the pipeline of large initial public offerings from China slows and equity volumes fall.

“If they financed the acquisition completely by debt then they would run a risk if interest rate picks up,” said Jonas Kan, a Hong Kong-based analyst at Daiwa Securities Capital Markets. Financing the acquisition with the combination of debt, convertible bonds and shares is “more financially sound. It cleared uncertainties for Hong Kong Exchanges.”

The acquisition still needs approval of the High Court of England and Wales, with a hearing set December 5, The transaction will take effect on or around December 6, the LME said in a separate statement.

“This is what we’ve been waiting on,” Thomas Monaco, an analyst at Mizuho Securities Asia in Hong Kong, said in a telephone interview. “It’s a little later than we would have thought, probably about a month or so.”

The LME backed Hong Kong Exchanges’ offer on June 15 over bids from CME Group, Intercontinental Exchange and NYSE Euronext. LME shareholders approved the takeover a month later. Hong Kong Exchanges may help the exchange gain access to China, the biggest metals buyer.

The offer was priced at 181 times LME’s 2011 net income, making it the most expensive bourse merger over US$1 billion. The deal doesn’t need approval from Hong Kong Exchanges’ shareholders. It is the first overseas acquisition for the Asian bourse and will add its first contracts in commodities.

Shareholders of the Tokyo and Osaka stock exchanges on November 20 approved the merger of Japan’s two largest bourses. Japan’s government wants to create a national exchange handling equities, commodities and other securities to help balance the rise of the Chinese markets. Singapore Exchange’s US$8.3 billion bid for Sydney-based ASX was blocked in April 2011 by Australia’s government on the grounds of national interest.

Shares of Hong Kong Exchanges dropped 14 per cent through on Thursday since its offer for the LME was reported in February. The benchmark Bloomberg World Exchanges Index of global bourse operators has fallen about 9 per cent in the same period. The stock hit this year’s low of HK$100 on July 26 after LME shareholders approved the merger.

Metals prices more than tripled in the past decade as demand from emerging markets overwhelmed supplies from mines. The LME handled a record US$15.4 trillion of contracts last year. The 135-years old exchange sets global prices for metals from copper to aluminum to nickel.

The bourse agreed to maintain the LME’s contract structure and open-outcry trading, conducted at the bourse on Leadenhall Street in London’s financial district.

The Asian exchange also will keep the existing warehousing network, help the LME develop its own clearinghouse and hold trading fees until at least the start of 2015. It will seek to bring “a lot more volume” to the LME and may help the LME to set up warehouses in China, reduce trading restrictions in China, or even expand operations to Asian hours and clearing contracts in yuan, Charles Li, Hong Kong Exchanges chief executive officer, said October 15.

Hong Kong Exchanges may expand the LME into trading iron ore, freight, coking coal and even agricultural products including rubber, as part of the next stage of growth after the acquisition, Li said.

Chris Hamilton, a spokesman for the FSA, confirmed the FSA has approved change in control of the LME.