Runners and riders in London Metal Exchange bid play
Preliminary bids for the London Metal Exchange (LME), the world's largest
industrial metals market place, are due this week with a previously estimated price tag of more than 1 billion pounds in doubt due to a row over a fee hike.
Bidders will include CME Group, the InterContinental Exchange and a consortium of the London Stock Exchange and Singapore Exchange (SGX), three industry sources have said.
UK-based broker ICAP and Deutsche Boerse-owned Eurex are also potential suitors.
Analysts and industry sources have valued the exchange at between 500 million pounds and 1.5 billion pounds ($783.4 million-2.4 billion) based on expectations of higher earnings boosted by new products and by self clearing.
The higher valuation will also help it borrow money at better rates, an industry source said. "It will be no longer the poor man's exchange," the source said.
In November, JP Morgan paid almost 25 million pounds for a 4.7 percent stake in the LME held by defunct broker MF Global Holdings , sources familiar with the matter have said, which implies a total value for the exchange at around 530 million pounds.
The price works out at 41.67 pounds per share, a premium of nearly ninefold from the a traded price of LME ordinary shares, 4.925 pounds, in July.
Market sources have said any bid would probably have to be at least 1 billion pounds because 800 million pounds was reportedly offered for the company in 2008.
The LME denies there was an approach or a bid. "It did not happen, there was no bid, approach or conversation," an LME spokesman said.
A billion pound offer works out to around 70 pounds a share.
But a dispute over LME plans to raise revenues with a new fee could mean potential bidders for the exchange will trim their offers because any revision could dent projected extra revenue included in its valuation, industry sources said.
The LME operates on a constrained-profit model, and has so far kept fees low for the trading houses and banks that own the exchange and use the market.
That would have to change, UBS analyst Alex Kramm said.
"If you want to be bought by a public exchange, you can't operate on a cost-recovery model any more," Kramm said. "Certainly something needs to be done there."
The LME's pre-tax profit in 2010, limited by the low fees, fell 28 percent to 12.5 million pounds, according to figures on the LME website.
Below is a rundown of some of the possible bidders:
ICE:
ICE Chief Executive Jeffrey Sprecher said last month he is looking at potential acquisitions to grab a bigger share of the clearing business, and that the LME could add value to his company.
"It seems very much like an ICE kind of deal," Kramm said. "ICE has a history of doing transactions that are a little bit more complex."
The LME has announced plans to build its own clearing business.
The U.S.-based exchange and clearing house posted better than expected quarterly results this month.
The combination of the main European energy market with the main European metals venue makes some sense and would create a strong Europe-based commodities exchange group at a time that Asian markets look set to dwarf their European rivals.
CME:
A merger would give the Chicago-based company the platform in Europe it has long wanted and would make some sense for both parties.
CME is looking to build its European clearing business. CME could move the LME to its own technology, which would generate savings for clients.
CME already has a locally licensed clearing body - CME Clearing in Europe - through which it can post trades.
CME already trades copper, steel, gold and other precious metals contracts, so there are synergies plus the potential for offsetting margins across other asset classes.
"For the CME, certainly they have ambitions in Europe, but I think if you look at the CME acquisitions historically...they've done the deals that were easy or and not the ones that were complex," Kramm said.
LSE/SGX:
A source with direct knowledge of the matter told Reuters in September the SGX would tie up with the LSE to make a joint bid for the LME.
The joint bid underscores the ambitions of both exchanges to diversify into the fast-growing space of metals trading, as traditional businesses of equity and derivatives trading faces increasing competition.
Both the SGX and the LSE are coming off failed merger attempts amid a flurry of exchange auctions that were prompted by loss of market share across the industry to alternative trading venues.
SGX, led by experienced dealmaker Magnus Bocker, has been trying to raise the profile of Asia's second-largest listed bourse and compete against its larger rival, the Hong Kong Mercantile Exchange.
His attempts to buy ASX Ltd was rejected by the Australian government last year. The LSE too had to face defeat in its pursuit of the Toronto Stock Exchange after a consortium of Canadian banks launched a counter offer.
A bid for the LME fits with the LSE plan to diversify into futures.
EUREX:
A tie up with Deutsche Boerse's Eurex could drive cost savings by moving the LME onto its technology and also has a clearing house, Eurex Clearing, which could prove valuable to LME. The deal would take Eurex into commodities and give the LME a powerful owner, which would be useful as the LME looks outside of Europe.
Deutsche Boerse could put the disappointment of a failed merger deal with NYSE Euronext behind it by turning its attention to European exchanges and clearing assets.
ICAP:
ICAP has expertise in commodities as the largest broker in the market and looks to have the necessary deep pockets to afford the exchange. It would also keep the LME in British hands.