The London Metal Exchange, founded 134 years ago above a hat shop in the financial district, may be the latest major mutual exchange to be bought after record trading volumes attracted the interest of multiple bidders.
The bourse is valued at about 160 million pounds ($247 million), based on the last published price of its closely held shares, according to Niamh Alexander, an analyst at KBW Inc. in New York. The exchange’s value may be “significantly more” than its 2010 net income of 9.5 million pounds would suggest because so few exchanges of its kind are for sale, said Ruben Lee, chief executive officer of Oxford Finance Group, a London-based company specializing in financial and commodity markets.
The LME, which said Sept. 23 it had received “several expressions of interest,” handles about 80 percent of global trade in metals futures. Prices more than tripled in the past decade as demand from emerging markets led by China overwhelmed supplies from mines. The LME, which is owned by its members, handled $11.6 trillion of contracts last year, compared with $2.5 trillion in 1999, reflecting both higher prices and increasing speculative interest in raw materials.
“The LME is the last major mutual exchange,” said Christopher Gilbert, a professor at the University of Trento in Italy who has followed the bourse since 1971. “A change in ownership will shift the balance of power within the exchange from the industrial users toward the financial community.”
The LME said Sept. 23 it would “begin a formal process which may or may not lead to an acceptable offer for the company being received.” The exchange hired U.S. investment bank Moelis & Co. to advise it. Miriam Heywood, a spokeswoman for the exchange, declined to elaborate on the statement.
Bidders may include CME Group Inc., the world’s largest futures market, IntercontinentalExchange Inc. and Singapore Exchange Ltd., KBW’s Alexander wrote in a report. Allan Schoenberg, a spokesman for CME in London, Kelly Loeffler, a spokeswoman for ICE in Atlanta, and Carolyn Lim, a spokeswoman for Singapore Exchange, declined to comment. The London Stock Exchange may also be interested, the Guardian reported on Sept. 23. LSE spokesman Ed Clark also declined to comment.
The selling price of more than 1 billion pounds as reported by some news organizations “appears high,” UBS AG analyst Alex Kramm said in a report today. LME may earn $27 million in 2012, according to the report.
CME, based in Chicago, bought the New York Mercantile Exchange for $7.6 billion in August 2008, while ICE, based in Atlanta, bought the New York Board of Trade in 2007 for $1.79 billion, according to data compiled by Bloomberg. Singapore Exchange’s A$8.3 billion ($8.1 billion) offer to buy ASX Ltd., the owner of Australia’s main bourse, was blocked by the Australian government in April.
Singapore Exchange and the LME have cooperated in introducing copper, zinc and aluminum futures on the Southeast Asian bourse. The LME-SGX contracts of five metric tons each started trading in February and compare with the benchmark 25-ton contracts traded in London. The bourse operator is not looking for other merger opportunities, Magnus Bocker, chief executive officer of Singapore Exchange, said this month.
“There are in fact very few successful exchanges that are actually up for sale, so the LME is in that sense a jewel,” said Lee of Oxford Finance Group. “The most likely bidders are going to be the cash-rich exchanges which already have a footprint in commodities. The LME has to be attractive to the Asian exchanges, and it could be any one of them.”
Buying the LME would be a “relatively small” acquisition for either CME or ICE, KBW’s Alexander wrote in her report. A new owner could raise the exchange’s earnings by handling its clearing, bringing back fees for market data and increasing trading costs, she said. CME and ICE already have their own clearing systems.
The LME clears trades through LCH.Clearnet Group Ltd., in which it owns 3.27 million shares, and said in May it was considering setting up a new clearing system to boost profit. The exchange appointed Trevor Spanner, chief operating officer of European Central Counterparty Ltd., as managing director of post-trade services this month.
Glencore Share Sale
Interest in commodities surged in the past decade as shortages drove prices higher. Investors held about $431 billion in raw materials by July, an almost fivefold gain in six years, according to Barclays Capital. Glencore International Plc, the Baar, Switzerland-based commodities trader, sold shares in May, ending more than three decades of operating as a closely held partnership. The offering valued the company at $59.2 billion.
The LME has 92 members listed on its website, including units of Goldman Sachs Group Inc., Barclays Plc and Citigroup Inc. There are seven categories of membership, conferring different rights in the handling of contracts. There are 12 category 1 members who are allowed in the bourse’s ring, a 6-meter-wide (20-foot) trading pit in Leadenhall Street, about a 10-minute walk from the Bank of England.
It is London’s last so-called open outcry trading floor and has its origins in the Jerusalem Coffee House in the financial district where metals traders would meet in the early 19th century. Merchants would draw a circle in the sawdust around which people would make their bids.
Brokers also trade through the bourse’s Select electronic platform and by phone. Select accounted for 52 percent of volume and the ring 21 percent a year ago, LME data show.
The exchange is owned by LME Holdings Ltd., which issues two share classes. There are 12.9 million ordinary shares, which confer ownership and traded at 4.925 pounds in July, according to data on the bourse’s website. There are also 1.34 million B shares, which exchanged hands at 70 pounds in July. Neither shares trade on an exchange.
Owners of B shares get no dividend and have no right to the profits or assets of the company, according to the articles of association. In the event of a distribution of assets, they are entitled to get the nominal value of the capital paid up on each share. They can’t attend company meetings unless changes to their rights are being considered. It is mandatory for four categories of membership to own the B shares.
“Metals trading continues to expand and new metals and products are growing the reach of the market,” said John Meyer, a mining and metals analyst at Fairfax IS in London. “The LME is proven to be one of the, if not the, most resilient markets in the world in times of crisis. In 2008, investors kept funds with LME brokers rather than banks.”
The LME was founded in 1877 to feed industrial Britain’s need for metals. Its benchmark contracts are three-month futures because that’s how long it took in the days of steamships to get copper from Chile or tin from Southeast Asia.
The LME started trading steel futures in 2008 and expanded into molybdenum and cobalt in 2010, adding to eight contracts in non-ferrous metals and its LMEX index of six industrial metals. The bourse introduced so-called LMEminis in February, which are available through the Singapore Exchange.
“The sale of the LME is an opportunity for the shareholders to sell out based on current volume,” said David Threlkeld, president of Resolved Inc., a commodities trading and hedging adviser in Scottsdale, Arizona. “Selling the LME at this point would be as smart as Glencore going public at the top.”