JPMorgan Chase & Co. (JPM) will sell its physical commodities unit to Mercuria Energy Group Ltd. for $3.5 billion, ending a five-year foray into owning and storing raw materials amid pressure from regulators to leave the business.
The deal, disclosed in a statement from New York-based JPMorgan today, takes the bank out of industries such as petroleum products and power while cementing Mercuria’s standing among the world’s biggest commodity traders. JPMorgan will continue to provide services and products tied to commodities including financing, market-making and the vaulting and trading of precious metals, the bank said.
“Our goal from the outset was to find a buyer that was interested in preserving the value of JPMorgan’s physical business,” Blythe Masters, head of the company’s global commodities operations, said in the statement. “Mercuria is a global leader in the commodities markets and an excellent long-term home.”
JPMorgan is selling amid concern among regulators that banks could control prices if they own commodities as well as trade them, or suffer catastrophic losses that would endanger the financial system. The Federal Reserve said in July it might force insured lenders to get out, and JPMorgan agreed later that month to pay $410 million to settle claims that it manipulated power markets, without admitting wrongdoing.
The sale is scheduled to be completed in the third quarter and isn’t expected to have a significant effect on earnings at JPMorgan, the biggest U.S. bank by assets, according to the statement. The stock gained 11 cents to $58.17 at 2 p.m. in New York. The company didn’t say what role Masters, 44, will play in the future.
Masters has been occupied with negotiating the sale and will now turn to conversations with Mercuria about whether she and her managers will join the buyer, said a person with knowledge of the deal. She declined to comment on her plans.
Mercuria was started in 2004 by former Goldman Sachs (GS) Group Inc. traders Marco Dunand and Daniel Jaeggi and is now the world’s fourth-largest independent commodity trader. Dunand and Jaeggi each own 15 percent of the Geneva-based company, which has grown rapidly in the past three years.
From 2011 to 2013, Mercuria hired 570 people, including executives from investment banks such as Goldman Sachs and Barclays Plc. That boosted the staff to 1,200 from about 10 in 2004.
Mercuria posted a $343 million profit in 2012 on revenue of $98 billion. The firm expanded its non-oil business in the past 18 months to include metals, gas, power and agricultural products. Trading from non-oil commodities now accounts for more than half of revenue, which topped $100 billion in 2013.
“This transaction represents a major step in the development of Mercuria,” Dunand said in a separate statement. “The market professionals at JPMorgan commodities are among the most highly regarded in the industry. The opportunity to integrate them in Mercuria’s global existing business will reinforce our group’s leading position in the energy and commodities markets.”
The JPMorgan unit had $3.3 billion in assets and generated $750 million in annual operating profit before compensation costs, according to people who have seen documents related to the sale. Those numbers would bring Mercuria closer to earnings achieved by competitors Vitol Group and Trafigura Beheer BV.
The unit would give Mercuria gas and power trading operations on both sides of the Atlantic, physical assets spanning 40 locations in North America, an oil-trading book with a supply and offtake contract at the largest refinery on the U.S. East Coast and 6 million barrels of storage leases in the Canadian oil sands.
Mercuria also gets Henry Bath & Sons Ltd., a 220-year-old metal-warehouse operator based in Liverpool, England. The firm was a founding member of the London Metal Exchange, with products today that include aluminum, steel and copper as well as cocoa and coffee, according to its website.
Mercuria beat offers from Macquarie Group Ltd. and Blackstone Group LP (BX) to enter exclusive negotiations for the JPMorgan unit in February, according to two people with direct knowledge of the bidding.
The bulk of the $3.5 billion purchase price represents JPMorgan’s physical commodity inventory, including crude oil and base metals. Mercuria intends to fund the acquisition largely through existing trade finance lines such as revolving credit facilities, according to a person familiar with the company’s plans, who asked not to be identified because the information is private.
Mercuria could use third-party financiers to fund some assets or business lines acquired from JPMorgan or may sell assets it believes aren’t core to its business, the person said.
The trading firm has begun discussions with bankers regarding potential new credit lines or lending facilities and doesn’t plan on issuing a bond or tapping the public capital markets to fund the purchase, the person said.
Masters joined JPMorgan in 1991 after internships at the firm and became known that decade for helping develop credit-default swaps, the derivatives that enable investors to hedge risks on bonds. She was named to run the commodities business in late 2006.
JPMorgan’s commodities trading surged with the 2008 acquisition of Bear Stearns Cos., which included an energy-trading platform. To compete with Goldman Sachs and Morgan Stanley (MS), JPMorgan bought UBS AG (UBSN)’s global agriculture and Canadian commodities units in 2009, and part of commodities trader RBS Sempra in 2010. That deal brought JPMorgan the Henry Bath unit.
Before the acquisitions, JPMorgan missed out on opportunities that enriched rivals, including the 2008 spike in oil prices, because it lacked the infrastructure to store and ship oil and other commodities, Masters told employees during an August 2010 conference call.
Competitors were now scared of JPMorgan, she said at the time. “They’d better be, because this is a platform that’s going to win,” Masters said.
Spurred by complaints from industrial customers, lawmakers held hearings in July on whether banks abused their ownership of raw materials to inflate prices. U.S. lawmakers also warned that a catastrophe involving a bank-owned supertanker or power plant could jeopardize a lender’s health and leave taxpayers on the hook for a bailout.
A day earlier, the Fed said it was reviewing a decade-old decision that allowed lenders including JPMorgan and Citigroup Inc. into the business because physical commodities were “complementary” to banking.
JPMorgan announced in July that it was exploring a sale of its physical commodities business, including energy trading.