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NYSE Euronext and CME Kick Off Race to Buy LME

Jeremy Grant, Jack Farchy and Anousha Sakoui in London
Thursday, 3 May 2012 | 9:58 PM ET

NYSE Euronext and CME Group, the two U.S. exchange groups, have submitted bids for the London Metal Exchange, valuing it at up to £1 billion and kicking off a contest for the commodities business, according to people familiar with the matter.

Traders work on the floor of the London Metal Exchange in London, U.K.
Traders work on the floor of the London Metal Exchange in London, U.K.

The 135-year-old exchange, which hosts futures contracts used as global industry benchmarks for base metals from copper to nickel, is one of the last member-owned exchanges in the world. It is home to Europe’s last trading pit – known at the LME as the ring – where traders shout orders to each other.

The LME, which is owned by the banks and brokers that use it, announced in September that it had received preliminary expressions of interest from 10 potential suitors.

One person familiar with the sale process said that roughly half of the 15 or so companies that looked at the LME’s books had made an offer for the exchange in the first round of bidding that closed on Wednesday. IntercontinentalExchange (ICE), CME’s main rival and long seen as a frontrunner for the LME, had also submitted a bid and has hired JPMorgan as adviser, according to one person. ICE declined to comment.

The preliminary bids, which are likely to be honed in the coming months, offer valuations for the exchange roughly in line with the £1 billion that had been mooted by shareholders last year, though one person described that number as ­“aspirational”.

The LME’s board will meet to consider the bids on Thursday February 23. The idea of a sale has divided the LME’s members with some members reluctant to give up control of the exchange while others are keen to profit from their shareholdings. Shareholders would enjoy a windfall if the sale went ahead, with a valuation of £1 billion representing more than 15 times the last traded price before the sale process was announced.

Several potential suitors, including Deutsche Börse, decided not to bid, the people said, with the London Stock Exchange also unlikely to bid. CME Group, long seen as a frontrunner, and NYSE had submitted a “first round” bid, they said. Some bidders may have been put off by a public dispute among the LME’s board members about a decision to raise trading fees, in part designed to maximize the LME’s profitability ahead of a potential takeover.

NYSE Euronext was not previously seen as a likely bidder, in part because it was heavily involved in an attempted tie-up with Deutsche Börse, a deal that collapsed this month.

However, it is interested in the LME because of a possible fit with its existing soft and agricultural commodity derivatives business, part of NYSE Liffe – the former London International Financial Futures Exchange. That includes coffee, sugar, cocoa and wheat futures. The LME and NYSE Liffe already use many of the same warehouses for delivery of commodities.

The US exchange would also be able to send trades done on the LME for clearing at NYSE Liffe Clear, a fledgling clearing house that NYSE Euronext is building in London. Being able to combine the trading and clearing of securities under one roof is increasingly important to exchanges as they seek new sources of profits.

Ownership of the LME is restricted to its 93 members. The largest shareholders are JPMorgan Chase with a 10.9 percent stake, Goldman Sachs with 9.5 per cent, and Metdist, a family-owned metals trader, with 9.4 percent. Those three companies could between them block the sale, since any offer needs 75 percent shareholder support.

JPMorgan last November bought the shares that had been owned by bankrupt brokerage MF Global in a deal valuing the exchange at about £530 million.

The LME’s shareholders are likely to be more concerned about preserving the status quo of the exchange’s business model as they are about the value of the bids, numerous shareholders have told the FT. Maintaining parts of the LME’s infrastructure such as its network of registered warehouses and the complex structure of its futures contracts are likely to be critical.

The LME is being advised by Moelis & Co. The companies declined to comment.

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