JPMorgan Poised to Make 157% on MF Global’s LME Shares

JPMorgan Poised to Make 157% Return on MF Global’s LME Stake
A trader reacts on the floor of the London Metal Exchange. Photographer: Jason Alden/Bloomberg

JPMorgan Chase & Co., the largest U.S. bank, is poised to more than double the value of its investment in London Metal Exchange shares bought seven months ago from the U.K. unit of bankrupt MF Global Holdings Ltd.

JPMorgan is the biggest investor in the LME, with 1.4 million shares valued at 150.6 million pounds ($236.8 million) after Hong Kong Exchanges & Clearing Ltd. agreed to buy the London bourse at 107.60 pounds a share. The New York-based bank increased its stake in November when it agreed to buy 600,000 shares from MF Global U.K. Ltd. at 41.92 pounds apiece.

“To say the price is very full and very generous to LME shareholders is an understatement,” said Peter Lenardos, an analyst at RBC Capital Markets in London. “The capital gain for them is massive. It’s an outstanding investment.”

Hong Kong Exchanges, which owns the fifth-largest equity market by market capitalization, offered 1.39 billion pounds on June 15 for the LME, which handled a record $15.4 trillion of contracts last year. The takeover would give the Asian exchange its first commodities business and the London bourse better access to China, the biggest user of everything from aluminum to zinc. LME shareholders will vote on the bid by the end of July.

MF Global, based in New York, filed the eighth-largest U.S. bankruptcy on Oct. 31 with debt of almost $40 billion after making wrong-way bets on sovereign debt. The 41.92 pounds paid by JPMorgan for MF Global’s shares compared with a previous sale of LME stock at 4.925 pounds in July. The 135-year-old LME had said in September it received “several expressions of interest” for the exchange.

‘Final Offers’

“While a condition on a price adjustment for any subsequent sale of the shares at a higher price was part of the sale negotiations, none of the nine parties who made final offers were prepared to agree to this condition,” Mike Pink, joint special administrator of MF Global U.K. at KPMG LLP, said in an e-mailed statement.

Kate Haywood, a London-based spokeswoman for JPMorgan, declined to comment.

Goldman Sachs Group Inc. raised its stake in the LME by 330,000 shares to 1.23 million in the year through September, according to U.K. Companies House filings. Lehman Brothers International Europe, the bankrupt London unit of Lehman Brothers Holdings Inc., transferred its 330,000 LME shares on July 1, according to Companies House. Goldman has never said whether it acquired those shares.

Metdist Trading

Goldman’s total stake is valued at 132.3 million pounds under the terms of Hong Kong Exchanges’ offer. Joanna Carss, a spokeswoman for Goldman in London, declined to comment.

Metdist Ltd. and Metdist Trading Ltd., U.K. metals trading companies owned by the Bagri family, have a combined 1.21 million LME shares, making the group the third-largest shareholder. Its stake is valued at 130.4 million pounds, or about 165 times Metdist Ltd.’s profit in 2011. The company’s fiscal year ended March 31.

Raj Bagri, who was chairman of the LME from 1993 to 2002, is a director of Metdist Ltd. and Metdist Trading Ltd., according to Companies House filings in 2011. His son Apurv Bagri is also named as a director of the two companies.

Sucden Financial Ltd. with 362,000 shares, would make about 39 million pounds if it sold its stake. The broker’s profit in 2011 was 9.04 million pounds on operating profit of 10.9 million pounds, according to a Companies House filing.

Triland Metals Ltd., which has 300,000 shares, would gain 32.3 million pounds on the sale of the LME. The broker’s profit for 2011 was 9.68 million pounds, compared with 12.9 million pounds the year before. Its fiscal year ended March 31, according to Companies House.

LME Shares

The LME issues two share classes. There are 12.9 million ordinary shares conferring ownership and voting rights. JPMorgan, Metdist Trading, Sucden Financial and Triland Metals are category 1 members of the bourse, giving them the right to trade on the floor of the exchange. Goldman is a category 2 member, which means it can’t participate in the so-called ring, home to London’s last open-outcry trading.

The takeover needs the approval of the U.K. Financial Services Authority as well as LME shareholders. It doesn’t need shareholder consent in Hong Kong.

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