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Hong Kong Exchanges Said to Make Offer for London Metal Exchange

Hong Kong Exchanges & Clearing Ltd., Asia’s biggest bourse operator, submitted a takeover bid for the London Metal Exchange, two people with knowledge of the matter said.

“LME is a big opportunity for all exchanges,” Kenneth Yue, an analyst at CCB International Securities Ltd., said in Hong Kong. “If Hong Kong Exchanges can win the bidding, it will definitely be good for the exchange in the long run. Many analysts think that the cash market is mature.”

Hong Kong Exchanges, which this year was overtaken as the world’s largest market company, will be making its first overseas acquisition should it beat competing offers from CME Group Inc., NYSE Euronext and IntercontinentalExchange Inc. for the LME. The Asian bourse operator is seeking to stem two consecutive quarters of profit declines as trading volumes and initial public offerings slow.

Scott Sapp, a spokesman for Hong Kong Exchanges, declined to comment beyond an April 30 statement from the bourse that said it “continues to participate in the process.” The people familiar with the bourse’s bid asked not to be identified because the process is confidential.

Hong Kong Exchanges has declined 5.6 percent in trading this year, valuing the company at $16.3 billion. Shares of Chicago-based CME, owner of the world’s biggest futures exchange, have gained 6.7 percent for the same period, increasing its market value to $17.3 billion.

Buying the London Metal Exchange will give Hong Kong Exchanges global reach and jumpstart its ambitions to expand its commodities offering. The 135-year-old metal bourse handles about 80 percent of global trading in metals futures, and reported record volume of $15.4 trillion last year.

Competing Bids

Miriam Heywood, a spokeswoman for the LME, said the exchange had no comment.

The LME began a process in September that it said may lead to it being acquired. CME, NYSE and IntercontinentalExchange submitted bids before a May 7 deadline, according to five people with direct knowledge of the matter.

The metal bourse is owned by 70 of its 92 members, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and UBS AG. Any bid will have to be approved by more than 50 percent of shareholders, with the owners of at least 75 percent of shares backing the move.

The purchase price for LME may be between 1 billion pounds ($1.6 billion) and 1.5 billion pounds, according to a May 3 report by UOB-Kay Hian Holdings Ltd. The bourse reported a profit of 9.5 million pounds for 2010.

Biggest IPO Market

Hong Kong Exchanges “would need to issue shares to buy the LME and that would dilute the earnings per share,” said Alex Au, Hong Kong-based managing director of Richland Capital Management Ltd., which oversees $300 million. “The earnings generated by the LME is quite tiny.”

Hong Kong Exchanges reported on May 8 a 7 percent profit drop for the three months ended March 30, a second quarterly decline, as expenses climbed and listing fees fell. The exchange was the world’s biggest initial public offering market in 2009, 2010, and 2011, according to the city’s regulator.

An “urgent action” is required to build its businesses in financial derivatives and commodities to meet its goal of being a comprehensive financial center for China, Hong Kong Exchanges said Feb. 29.

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