By Andrea Hotter
Hong Kong Exchanges and Clearing Ltd. (0388.HK) has been picked
as the preferred bidder to buy the London Metal Exchange, the
world's largest metals exchange and dominant in the trade of metals
like copper and aluminum. How did it get to this stage, and what
happens next?
How did the LME come to be for sale?
The LME board didn't place the exchange on the market. After
receiving one serious approach by IntercontinentalExchange Inc.
(ICE) last year, it decided to cast the net wider and see whether
others were also interested. In September, it said it had received
"several expressions of interest" which might lead to an offer to
buy the 135-year-old business.
How has the process worked so far?
The LME received binding offers from Hong Kong Exchanges, CME
Group Inc. (CME), IntercontinentalExchange Inc. (ICE) and NYSE
Liffe, the London-based derivatives arm of NYSE Euronext (NYX). It
knocked out NYSE Liffe and CME in May, and eliminated ICE after a
board meeting this week.
What is the deal worth?
The bid is an all-cash offer worth 1.388 billion pounds ($2.154
billion), equivalent to GBP107.6 a share, a huge premium to the
GBP41.92 a share currently. It's subject to approval by U.K.
regulator the Financial Services Authority, as well as the LME
members, who are also its shareholders.
What will change if Hong Kong Exchanges buys the LME?
The fees will probably go up, but not until Jan. 1, 2015. Hong
Kong Exchanges says it will keep fees at the revised levels set to
take effect next month until this date.
Clearing will also change, as the new owner would work with the
LME to develop in-house clearing, a bespoke project already
well-underway by the London-based exchange and slated to take
around another 18 months or so. The LME currently clears through
LCH.Clearnet, which is in turn being sold to the London Stock
Exchange. Hong Kong Exchanges' Chief Executive Charles Li says the
cost of the LMEClear project, as it is known, should be more than
covered by the sale of the LME's stake in LCH.Clearnet, worth
around GBP50 million to the metals exchange. Clearing fees could
change after this.
Hong Kong Exchanges says it will be the best possible steward
for the LME in Asia and particularly in China, where it will help
the LME achieve its long-sought-but-to-date frustrated goal of
warehouses to store metal. It also says it'll boost the number of
mainland Chinese participants in the LME, hand-holding them through
the membership process and enhancing their understanding of the
metals derivatives markets.
The deal would also bring new contracts such as emerging
market-related commodity indices and yuan-based products.
What will stay the same if Hong Kong Exchanges buys the LME?
The existing business model.
This includes open-outcry trading in the ring, the LME's complex
and unique daily prompt date contracts structure, along with its
membership structure and capacity for warehousing and physical
delivery. The LME will remain based in London as a regulated
investment exchange, under supervision of U.K. regulator the
Financial Services Authority.
The current LME Chief Executive Martin Abbott will stay on after
the deal closes, and most of the management team will remain in
place.
What happens now?
Hong Kong Exchanges will need to convince LME members, who are
also its shareholders, to sell their shares. A sale isn't
guaranteed and the approval threshold is high, with 75% of shares
and 50% of members needed to back the deal for it to go ahead. A
vote will take place by the end of July and the deal would be
expected to close in the fourth quarter.
Who are the biggest shareholders?
JP Morgan is the biggest shareholder with a 10.8% stake held by
various of its subsidiary firms, giving it a stake worth around
GBP150 million based on the current offer price. Goldman Sachs
holds the next largest stake at around 9.53%, followed by Metdist,
the ring dealing firm owned by Lord Raj Bagri whose subsidiaries
have a combined stake worth 9.39%.
If all of the category one and two members of the LME that hold
ordinary shares in the exchange vote in favor of a deal, it would
go ahead with a 78% majority.
Is it all over?
No.
Some shareholders have expressed concerns that Hong Kong
Exchanges' links with China are a double-edged sword. Fears that
the balance of power may swing in favor of China, the world's
largest consumer of metals traded on the LME, have been raised by
several market participants in recent weeks. Hong Kong Exchanges
will have to convince members that their bid represents a
front-door, and not back-door, move into China, else risk the
chance of failing at the final hurdle.
As with most acquisitions, the deal includes the possibility for
the LME to consider a competing proposal from another party,
whether they have been in the process before or not. This means a
third party could enter with a bid that matches or tops Hong Kong
Exchanges' offer. Theoretically, ICE, NYSE Liffe or CME Group could
come back, either individually or in some kind of combined joint
bid.
Other parties could also enter; the London Stock Exchange had in
the past been mooted as a contender to buy the LME in a move that
would strengthen London's dominance as a center of trade and
resolve any corporate governance concerns that the might have been
raised to the FSA.
The break fee payable by both the LME and Hong Kong Exchanges is
GBP25 million.
-Write to Andrea Hotter andrea.hotter@dowjones.com