Hong Kong Bourse in $1 Billion Share Sale for LME Deal

Hong Kong Exchanges Wins Approval for $2.2 Billion LME Takeover
The LME backed the Hong Kong Exchanges’ offer of 1.39 billion pounds for the LME on June 15 after offers from rivals CME Group Inc., Intercontinental Exchange Inc. and NYSE Euronext. Photographer: Jason Alden/Bloomberg

Hong Kong Exchanges & Clearing Ltd., the world’s No. 2 bourse company by value, is selling $1 billion in new shares to fund its London Metal Exchange takeover.

The company plans to raise HK$7.75 billion ($1 billion) in its first sale of new shares since listing by introduction in 2000. Hong Kong’s government said it will buy 3.81 million, or 5.8 percent, of the securities, which are being offered at HK$118 each, a 5.4 percent discount to yesterday’s closing price of HK$124.80. The stock fell 1.2 percent to HK$123.30.

Hong Kong Exchanges, which lost its place as the world’s biggest exchange operator by market value to CME Group, is seeking to broaden its business as the pipeline of large initial public offerings from China slows and equity volumes fall. The Financial Services Agency yesterday approved Hong Kong’s takeover of the LME, the venue for more than 80 percent of metals trading.

“If they financed the acquisition completely by debt then they would run a risk if interest rate picks up,” said Jonas Kan, a Hong Kong-based analyst at Daiwa Securities Capital Markets. Financing the acquisition with the combination of debt, convertible bonds and shares is “more financially sound. It cleared uncertainties for Hong Kong Exchanges.”

Biggest Holders

Hong Kong’s government, the largest single shareholder in the exchange operator, will buy 3,810,800 shares for HK$450 million, the Hong Kong Monetary Authority said in an e-mailed statement. The purchase will maintain the city’s 5.8 percent stake. The stock gained 3,128 percent from its June 2000 offer price of HK$3.99 through yesterday.

Deutsche Bank AG, HSBC Holdings Plc and UBS AG will manage the share sales, according to a statement from the bourse today. It is the first time the bourse has sold new shares since its listing in 2000, Henry Law, the company’s head of corporate communications, said.

The exchange sold $500 million in convertible bonds in September for the deal. They have an initial conversion price of HK$160 a share. Hong Kong Exchange signed a 543 million pound ($871 million) loan agreement with Deutsche Bank, HSBC and UBS in June.

“With the equity issue done, we’ll probably draw down on some of the debt facilities that we’ve got and we’ll look in the new year to see if we want to do anything further,” James Fok, Hong Kong Exchanges’ chief of staff, said by telephone. “In terms of equity capital we’re now done.”

China Access

The LME backed Hong Kong Exchanges’ offer on June 15 over bids from CME Group Inc., Intercontinental Exchange Inc. and NYSE Euronext. LME shareholders approved the takeover a month later. Hong Kong Exchanges may help the exchange gain access to China, the biggest metals buyer.

The offer was priced at 181 times LME’s 2011 net income, making it the most expensive bourse merger over $1 billion. The deal doesn’t need approval from Hong Kong Exchanges’ shareholders. It is the first overseas acquisition for the Asian bourse and will add its first contracts in commodities.

Shareholders of the Tokyo and Osaka stock exchanges on Nov. 20 approved the merger of Japan’s two largest bourses. Japan’s government wants to create a national exchange handling equities, commodities and other securities to help balance the rise of the Chinese markets. Singapore Exchange Ltd.’s $8.3 billion bid for Sydney-based ASX Ltd. was blocked in April 2011 by Australia’s government on the grounds of national interest.

Goodwill Risk

Shares of Hong Kong Exchanges dropped 14 percent through yesterday since its offer for the LME was reported in February. The benchmark Bloomberg World Exchanges Index of global bourse operators has fallen about 9 percent in the same period. The stock hit this year’s low of HK$100 on July 26 after LME shareholders approved the merger.

Citic Securities International reiterated a sell rating on the stock with a target price of HK$116.20 in a note today. The brokerage cited a “substantial goodwill impairment risk” form the deal, declining investment returns, high costs and increasing volatility in average daily trading volumes.

Metals prices more than tripled in the past decade as demand from emerging markets overwhelmed supplies from mines. The LME handled a record $15.4 trillion of contracts last year. The 135-years old exchange sets global prices for metals from copper to aluminum to nickel.

The bourse agreed to maintain the LME’s contract structure and open-outcry trading, conducted at the bourse on Leadenhall Street in London’s financial district.

Warehouse Network

The Asian exchange also will keep the existing warehousing network, help the LME develop its own clearinghouse and hold trading fees until at least the start of 2015. It will seek to bring “a lot more volume” to the LME and may help the LME to set up warehouses in China, reduce trading restrictions in China, or even expand operations to Asian hours and clearing contracts in yuan, Charles Li, Hong Kong Exchanges chief executive officer, said Oct. 15.

“In the short term the aim is to attract more Chinese members on to LME,” Hong Kong Exchanges’ Fok, who has been one of the architects of the deal, said. Bank of China Ltd. is the only member from the world’s second largest economy. “Anything further than that is going to require support from the various regulatory agencies.”

Hong Kong Exchanges may expand the LME into trading iron ore, freight, coking coal and even agricultural products including rubber, as part of the next stage of growth after the acquisition, Li said.

The acquisition still needs approval of the High Court of England and Wales, with a hearing set Dec. 5, The transaction will take effect on or around Dec. 6, the LME said in a separate statement.

Chris Hamilton, a spokesman for the FSA, confirmed the FSA has approved change in control of the LME.

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