The Singapore Exchange is in preliminary talks to buy London's iconic Baltic Exchange as the city-state seeks to expand and bolster its traditional influence in the shipping and commodities business amid increasing competition from Shanghai.
In an announcement, the SGX on Friday confirmed it is in talks with the storied exchange, just months after the London Metal Exchange (LME) made an approach.
Reuters reported late on Thursday that SGX, which owns the benchmark Singapore STI index, was one of a number of parties in talks with the privately owned exchange.
"Singapore has already established itself as a key maritime center across the Suez and the takeover ties in well with Singapore's ambition to cement its position as an alternate global maritime hub to London," said Rahul Kapoor, director of equity research at Drewry Financial Research Services.
Aside from the LME, SGX is competing against CME, ICE and Platts for the acquisition, Reuters reported.
The deal would also compliment SGX's current derivatives business, especially freight derivatives, said OCBC research analyst Carmen Lee in a note Friday.
"This could also further strengthen products like iron ore which SGX has been really successful in and could do the same for other commodity products that SGX is trying to launch," said Singapore-based Phillip Futures analyst, Daniel Ang.
Although there are other suitors in the game, SGX will have a lot more to gain from the deal due to the complimentary business, said Kapoor.
Singapore, the traditional shipping and commodities hub in Asia, is facing increasing competition from Shanghai, which overtook the city-state as the world's busiest port in 2010. The Chinese city is also jostling to become a commodities trading hub, setting up trading platforms for various products from oil to cotton.
The potential deal also comes amid a slump in commodities and a slowdown in global trade that has battered shipping with the Baltic Dry Index breaching record lows repeatedly. The BDI is a measure of freight rates for shipping dry bulk cargoes such as iron ore, coal and grains.
"The state of the dry bulk shipping markets does have a role to play in these talks. It's important to note that the derivative volumes have slumped both in value and traded contracts terms," said Drewry's Kapoor.
"The Baltic Exchange has tried a lot of new initiatives in the recent past but those haven't worked to the extent desired. Volumes have dried up and hence the takeover talks are a result of partly poor state of the industry and in part corporate M&A for the SGX," Kapoor said.
As early as October, sources told Reuters the LME had informally approached the exchange about a potential deal. And since then, there have been discussions with a number of other parties, the sources told Reuters.
"A deal would be seen as earnings accretive in the near-term," a Reuters source said. It was unclear whether the talks had been initiated by the Baltic or its suitors.
CME, ICE, Platts and LME declined to comment, as did Baltic Exchange chief executive Jeremy Penn when contacted by Reuters on Thursday.
The Baltic produces daily benchmark rates and indices that are used across the world to trade and settle freight contracts. Despite its name, it is no longer a forum for trade in the chartering of vessels.
While the shipping market is currently suffering from overcapacity and sluggish global trade, the Baltic has carved out an industry-leading position in freight derivatives including through its Baltex platform.
Three sources told Reuters said Japan's biggest investment bank Nomura Holdings had been appointed as Baltic's adviser for a possible sale. Nomura declined to comment.
Sources said there had also been contact between the Baltic, which is owned by around 380 shareholders, many from the shipping industry, and the London Stock Exchange, which has a majority stake in clearing house LCH.Clearnet.
This, though, is unlikely to progress given the possible merger between Deutsche Boerse and the LSE announced this week. The LSE declined to comment.
The LME - previously owned by its members - was itself bought by Hong Kong Exchanges and Clearing (HKEx) in 2012 for $2.2 billion. A deal with the Baltic would help the LME to expand its reach beyond metals.
The Baltic, founded in 1744, had previously rebuffed approaches from the LME.
The first was an LME-proposed joint venture in 2010 to launch an exchange for freight derivatives trading.
In 2013, sources familiar with the matter said the Baltic had received expressions of interest from the LME and other suitors for its Baltex platform, launched in 2011.