Hong Kong stock exchange has sealed a deal to acquire LME Holdings Limited, the parent company of the world’s largest non ferrous metal trading bourse London Metal Exchange, in a deal worth £1.38 billion ($2.18 billion). This would be one of the most high profile acquisition of a financial services company in the developed world by an emerging markets company.
As per the deal, HK Investment (UK) Limited (HKEx Investment) and Hong Kong Exchanges and Clearing Limited (HKEx) have entered into an agreement to buyout LME Holdings. The deal involves purchase of £107.60 per LME ordinary share in cash.
The three top shareholders of LME include JP Morgan and Goldman Sachs besides Metdist, a commodity broker owned by London-based NRI family Bagris. Metdist owns 9.4 per cent of LME through two entities and will get £130.4 million or $205 million for selling its stake.
Metdist has been trading on the LME open outcry trading floor since 1972. It also trades physical contracts as well as the futures contracts on a daily basis all of the LME non-ferrous metal contracts including Copper Grade A, Primary Aluminium, Standard Lead, Tin, Special High Grade Zinc, Primary Nickel, Aluminium Alloy and NASAAC (North American Special Aluminium Alloy Contract) as well as the LME global PP Plastic, LME global LL Plastic and Steel Billet contracts.
Metdist group was started by Kolkata-born 81-year old Raj Bagri, who started his metal trading career at the age of 15 as an apprentice with Binani Metals Group. In 1959, at the age of 29 he shifted to London and founded his own firm Metal Distributors UK (or Metdist). Eleven years later he became a member of LME and climbed the ladders to become the chairman of the exchange in 1993, the first Indian to do so.
Metdist Group has grown from being just a trader to manufacturing of non-ferrous metals, especially rod and wire products. The group had previously invested in various Indian firms. Bagri was conferred the CBE by the British queen and in 1997, he was made Baron Bagri of Regent's Park in the City of Westminster, for life. His son Apurv now leads the group affairs while his daughter is married to industrialist Chandrakant Birla.
Nuts & Bolts Of The Deal:
Charles Li, chief executive of HKEx said: “The acquisition of LME Holdings represents a unique opportunity for us to acquire in one stroke a position of global leadership in the commodities market. This is consistent with our strategy to expand beyond equities and equity derivatives and offers significant opportunities for revenue growth. HKEx brings a unique ability to help the LME grow its business in Asia and, particularly, China and we will capitalise on this to deliver value for all our stakeholders.”
HKEx is the leading operator of exchanges and clearing houses in Asia and a key player globally. It operates two exchanges and three clearing houses covering both cash and derivatives markets. It is the world’s leading exchange for IPOs and has topped global IPO league tables for each of the past three years. In 2011, the total market capitalisation of companies listed on HKEx exceeded HK$ 17.5 trillion and average daily turnover on its cash market exceeded HK$69.7 billion.
The move will accelerate HKEx’s strategy to develop its own commodity offering and to diversify its revenue sources.
HKEx will finance the acquisition from existing cash resources and new bank facilities including short and long-term loan facilities totalling at least £1.1 billion from a group of banks including China Development Bank, Deutsche Bank, HSBC and UBS. HKEx expects to refinance part or all of the credit facilities at a later date through a combination of equity and bond issuance.
The transaction involves retaining the LME brand and its business model (including the operation of the “Ring” or open outcry trading). HKEx plans to expand LME’s business and operations in Chinese and rest of Asia.
The directors of the board have unanimously recommended the shareholders of LME to vote in favour of the transaction at the Ordinary Shareholder meetings expected to be convened before the end of July 2012.
Martin Abbott, chief executive of LME Holdings and the LME said: “This proposed combination will secure the future of the LME for its next 135 years. The LME's global benchmarks plus HKEx's pre-eminent market position in Asia, its IT and trading resources and clearing expertise will cement the LME's position as the world's foremost base metals trading venue.”
It achieved record volumes during 2011, with 146.6 million lots traded, equivalent to $15.4 trillion in notional contract value. Over the past five years, trading volumes have grown by 12.1 per cent per annum (2007-2011 compound annual growth rate), despite the difficult global economic environment. However, it is yet to leverage the growth in Asia.
This has placed it at a disadvantage given the rise of China in the commodity business.
The deal follows a number of proposals in the past to look at strategic alternatives including the sale of the LME.
HKEx is the world’s second largest exchange group by market capitalisation. It was formed through the merger of The Stock Exchange of Hong Kong Limited, Hong Kong Futures Exchange Limited and Hong Kong Securities Clearing Company Limited in 2000. It was listed in the same year on the Main Board of SEHK. HKEx adheres to global best practices in corporate governance and has a diversified and international shareholder base and an experienced board of directors.
The transaction is expected to be completed during the fourth quarter of 2012.
Moelis & Company is the financial adviser to LME Holdings and Rothschild and UBS are acting as financial advisers to HKEx. Freshfields Bruckhaus Deringer LLP and Jones Day are acting as legal advisers to LME Holdings and Allen & Overy are acting as legal adviser to HKEx.