Executives of the Hong Kong Exchanges and Clearing Ltd. and the London Metal Exchange said Friday they had agreed on a £1,388 million ($2.15 billion) cash bid by the Hong Kong exchange to acquire the 135-year-old London exchange.
The transaction is contingent upon a vote of LME shareholders expected to take place in late July as well as court and regulatory approval in the United Kingdom by the Financial Services Authority, which regulates the LME as a recognized investment exchange. The takeover could be completed in the fourth quarter.
The LME will continue to operate its open outcry “Ring” in London with its established daily prompt date contract structure, existing membership structure and capacity for warehouse and physical delivery, HKEx executives said in a presentation to analysts and press in Hong Kong.
“LME really represents a very compelling transaction for Hong Kong Stock Exchange,” Charles Li, chief executive officer of HKEx, said. “We are combining the two global exchanges in metals and off-shore China. This will allow us to really kick off our commodity strategy and leverage strongly on the very complementary business that we have here today.”
Li praised the LME’s current position, adding, “The business model is very heavily physical in nature. This is not a typical derivatives trading exchange. This is heavily rooted in the physical, in the real economy of the world. Members include the industry’s most influential financial institutions and trading companies. It’s really a globally recognized branding.”
The combination will also allow the LME to expand aggressively in Asia and China by establishing a network of LME-approved metals warehouses and moving into renminbi-based trading. The HKEx ownership will also support the development of the LME’s own clearing house by drawing on HKEx experience in operating three clearing houses.
The LME already accounts for an estimated 80% for global nonferrous metal forward and option contracts while China accounts for an estimated 42 percent of global base metals consumption and 68% of production, according to the HKEx.
Martin Abbott, the LME’s chief executive officer, and much of the 100-person management staff of the LME will remain in place, Li said. Representatives of the HKEx are also to be added to a reconstituted LME board.
“The LME’s global benchmarks plus HKEx’s pre-eminent market poslition in Asia, its IT and trading resources and clearing expertise will cement the LME’s position as the world’s foremost base metals trading exchange,” Abbott said in a statement.
Under the terms of the offer made by HKex, LME shareholders will receive £107.60 in cash for each ordinary share. The stock traded at £4.925 per share in July 2011 before the exchanged announced in September that it was considering a possible sale. Among the largest shareholders are JPMorgan Chase & Co., Goldman Sachs Group Inc. and closely held metals trader Metdist Ltd.
HKEx executives said the takeover would be finance from existing cash resources and new bank facilities with at least £1,100 in short and long-term facilities having been secured from a group of banks including China Development Bank, Deutsche Bank, HSBC and UBS.
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted atpburgert@resourceinvestor.com.