U.S. News

LME Is Target of £1 Billion Consolidation

Jeremy Grant and Jack Farchy
Traders work on the floor of the London Metal Exchange in London, U.K.

The London Metal Exchange on Friday became the latest exchange to be swept up in consolidation when it said it had “received several expressions of interest with regard to potential strategic transactions”.

Likely bidders for the 130-year old exchange, which is the world’s biggest metals market by volume, are CME Group, the US exchange, SGX, the Singapore exchange and IntercontinentalExchange, a CME rival, a person familiar with the matter said.

The exchange could be worth more than £1 billion, members believe. The illiquid ordinary shares of the exchange last traded at £70, according to JPMorgan Cazenove, its broker, implying a valuation of about £900 million.

All three potential bidders offer trading in metals on a smaller scale than the LME. Any purchase of LME would give the buyer by far the dominant metals trading business in the world at a time when China is emerging as a serious rival in key metals such as copper, traded on the Shanghai Futures Exchange.

CME trades precious, ferrous and base metal derivatives at Comex, part of the former New York Mercantile Exchange, which CME bought in 2009. Its biggest contract is gold futures. CME declined to comment.

The LME accounts for 80 per cent of traded volume in global metal futures transactions. LME prices are used as benchmarks by miners and consumers. The LME offers futures and options contracts for aluminium, copper, tin, nickel, zinc, lead, aluminium alloy, steel billet as well as minor metals – cobalt and molybdenum.

While the exchange generated just £12.5 million in pre-tax profits last year, shareholders believe it could produce significantly higher earnings by raising fees to levels comparable with other exchanges. The LME charges about 25 cents in fees per trade, compared to CME’s fees of about $1, traders said.

To succeed, any bidder would have to negotiate a price with the LME’s 92 members, many of whom also own shares. The largest shareholders are Goldman Sachs, Metdist, the privately owned metals trader, JPMorgan, MF Global and UBS, which between them hold a third of the company.

The exchange is one of the few left not to have demutualised and listed on a stock exchange. It also retains one of the world’s last remaining trading pits – known as “rings” at the LME – where traders shout orders to each other.

“Until now, probably people have always thought that it may never happen,” said an executive at one shareholding company. However, a valuation above £1 billion “may start to get people interested”, he added.

The LME said its board, which is being advised by Moelis, an M&A advisory firm, would begin a formal process “which may or may not lead to an acceptable offer for the company being received”.

It said: “The interest shown in the LME, where total trading volumes are currently at record levels, reflects the importance of the exchange in global commodities markets.”

Martin Abbott, chief executive of the LME, said: “The LME’s future as the world’s leading metal exchange is more secure today than at any point in its history.”

Average daily volume is 18 per cent higher so far this year than the average daily volume for the whole of last year.

Last year, the LME saw record trading volumes of 120m lots, the equivalent of 2.8bn tonnes of metal.

The LME in May said it was considering building its own clearing house and this month hired its first head of post-trade business.