-- Hong Kong Exchanges & Clearing buying London Metal
Exchange for GBP1.388 billion
-- Deal will gain city's stock exchange instant entry into
commodities trading amid China's growing appetite for metals
-- HKEx will pay in cash and GBP1.1 billion in loans
-- Acquisition expected to be completed in the fourth
quarter
(Adds updates throughout)
By Nisha Gopalan
HONG KONG--Hong Kong Exchanges & Clearing Ltd. (0388.HK)
said Friday it has entered into a deal to buy the London Metal
Exchange for 1.388 billion pounds sterling (US$2.15 billion),
giving the city's stock exchange instant entry into commodities
trading amid China's growing appetite for metals.
It muscled out shortlisted IntercontinentalExchange Inc. (ICE)
as the allure of China swung the balance. But the deal still awaits
approval from the U.K.'s Financial Services Authority and
shareholders representing at least 75% of LME's ordinary
shares.
"The deal could immediately prop up HKEx to become one of the
major global metals and commodities exchange," Hong Kong Exchanges
Chief Executive Charles Li said.
"It allows us to offer products beyond traditional equities
derivatives trading, to currencies, fixed income and commodities.
It will bring all-round development for the exchange."
The offer, valuing the London-based member-owned exchange at
GBP107.60 per share, will be financed with cash and GBP1.1 billion
in bank loans. LME accounts for 80% of trade in non-ferrous metals
such as copper and aluminum, as well as other industrial
metals.
The acquisition for Europe's last open outcry exchange is
expected to be completed in the fourth quarter of the year and will
be earnings enhancing in the third year after the deal closes, Hong
Kong Exchanges said. The exchange said it intends to keep the LME's
current business model and the iconic open outcry trading set
up.
Earlier bidders for LME before ICE and Hong Kong Exchanges were
CME Group Inc and NYSE Liffe, the London-headquartered derivatives
arm of NYSE Euronext.
For Hong Kong Exchanges, the GBP1.388 billion bet on commodities
is a major reversal of strategy for the market that had led the
world in initial public offerings for the past three years but is
lagging far behind rivals this year.
The strategy shift dates back to early 2011 when the exchange,
still smarting from a drought in trading during the financial
crisis, decided to cut its dependence on stocks and consider
expanding into commodities trading.
Officials at the exchange, which made its name doing stock
offerings for China's giant state-owned companies, believed that it
could go beyond its role as a conduit for capital for mainland
businesses and could fill the country's industrial needs as
well.
Soon after the decision, the LME came on the market and Hong
Kong Exchanges quickly bid. The offer, its first ever for a rival
exchange, put it on the short list.
"HKEx's cash equities market has grown to the point where
incremental listings and other new products have a limited ability
to drive revenue growth," said Sam Hilton, a Hong Kong-based
analyst at US brokerage Keefe, Bruyette & Woods. The exchange
needed a new asset class that could drive trading, so when LME came
up for sale, it made an "opportunistic" bid, he said.
Driving the shift towards commodities is CEO Mr. Li, a former
JPMorgan banker and ex-journalist who joined the bourse in late
2009. He surprised the market in January when he said commodities
could offer the best growth opportunities, along with alliances
with Chinese stock exchanges, which had been the exchange's
long-time strategy.
Like the exchange he is hoping to reshape, Beijing-born Mr. Li
has a history of reinvention. He worked on an oil rig, as an editor
at mainland newspaper China Daily, then got a law degree and went
to Wall Street where he led the ultimately aborted $18 billion bid
by China's Cnooc Ltd. for U.S. oil producer Unocal Corp. in
2005.
The move into commodities comes after Mr. Li's other main
initiative--getting listings from foreign companies--has had mixed
success. Hong Kong Exchanges has been home to listings such as
United Co. Rusal in 2010 and Italian luxury house Prada SpA last
year, but many of the stocks have performed poorly and trading
volume has remained low. Jeweler Graff Diamonds Corp. pulled its $1
billion IPO last month.
Hong Kong Exchanges is now ranked sixth in IPOs globally this
year, behind Nasdaq Stock Market, the New York Stock Exchange, and
even the Shanghai stock exchange, according to Dealogic.
The bid for the LME put Hong Kong Exchanges into competition
with established commodity players such as the Chicago Mercantile
Exchange and the Intercontinental Exchange, which was the last
bidder left in the auction.
Adding to the credibility of its bid, the exchange in the last
year has hired a chief financial officer from commodities trader
Noble Group Ltd., a former top official from China's Securities
Regulatory Commission and a former CME executive.
Hong Kong made the case that it could boost the LME's business
in China, which accounts for 40% of the world's demand in metals,
but just a fifth of LME's revenue.
China has three futures exchanges, but just one dealing in
nonferrous metals, the retail-focused Shanghai Futures Exchange,
which is denominated in yuan, and not the currency of global
commodities trade, the U.S. dollar.
Still, "given competing metals contracts from the Shanghai
Futures Exchange, HKEx's ability to accelerate the China market
opening process on behalf of LME, while better than LME's, may be
limited," said Keefe, Bruyette & Woods' Hilton.
Write to Nisha Gopalan at nisha.gopalan@dowjones.com