June 15 (Bloomberg) -- Hong Kong Exchanges & Clearing Ltd., host to the world’s fifth-largest equity market, agreed to pay 1.39 billion pounds ($2.15 billion) for the London Metal Exchange, which handles more than 80 percent of global trade in industrial-metal futures
LME investors will get 107.60 pounds per ordinary share in cash, with a vote scheduled before the end of next month, the bourses said today. The stock traded at 4.925 pounds in July 2011, before the LME said it was considering bids. JPMorgan Chase & Co., Goldman Sachs Group Inc. and closely held Metdist Ltd. are the biggest LME shareholders.
Hong Kong is the only place in China where investors can freely buy and sell shares in Industrial & Commercial Bank of China Ltd., the biggest lender by value, and PetroChina Co., Asia’s largest company. The deal would be Hong Kong Exchanges’ first overseas acquisition. The 135-year-old LME sets global benchmark prices for metals including copper, aluminum and nickel, of which China consumes more than any other nation. Its network of warehouses doesn’t currently extend into the country.
“Hong Kong Exchanges can be positive for LME if it can enhance its China exposure,” said Jonas Kan, the head of Hong Kong research at Daiwa Capital Markets. “HKEx has a clearing business, visibility in listing for Chinese companies, and has experience working with regulators and authorities in China, which can add value to the LME.”
Buying the LME would give Hong Kong Exchanges its first commodities contracts. Shares of Hong Kong Exchanges retreated 23 percent since the South China Morning Post reported its bid Feb. 18. That compares with a 15 percent drop in the Bloomberg World Exchanges Index. Hong Kong Exchanges is paying with existing cash and new loans of at least 1.1 billion pounds.
“Their full potential will not be realized until they can tap the geography,” Charles Li, chief executive officer of Hong Kong Exchanges, said at a press conference in Hong Kong today. “They need China expertise. They need Asia expertise. And we have a lot of it.”
The LME management led by Martin Abbott, chief executive officer, will stay, Li said. “Given the magnitude of what we’re talking about here, clearly we will significantly augment the management structure.” Some people may be moved between Hong Kong and London and commodities experts hired, he said.
Shares of Hong Kong Exchanges declined 9.4 percent this year, valuing the company at $15.66 billion. Its net income fell 7 percent in the first quarter as listing fees declined. Hong Kong Exchanges recently lost its rank as the world’s most valuable exchange company to CME Group Inc.
The Chinese city’s bourse wants to expand its product base as the pipeline of large initial public offerings from China dries up. Hong Kong has hosted $3.2 billion in IPOs this year, compared with $9.8 billion in the comparable period in 2011, according to data compiled by Bloomberg.
“I’m skeptical about the deal,” said Andrew Sullivan, principal trader at Piper Jaffray Asia Securities Ltd. in Hong Kong. “They want to build up the bourse and expand into other areas. They’re spending a lot of money at a time they’re not getting an awful lot of income. You won’t see the synergy straight away.”
The LME reported a 19 percent drop in net income to 7.68 million pounds last year, even as revenue climbed 21 percent to 61.2 million pounds.
The offer will be recommended by all the LME’s directors and sent to investors within 15 business days, with a meeting held before the end of July. It will need approval by more than 50 percent of LME shareholders, with the owners of at least 75 percent of the stock backing the move. The LME is owned by more than 60 of its 94 members.
The takeover, which needs the approval of the U.K.’s Financial Services Authority, may be completed in the fourth quarter. Both sides agreed to break fees of 25 million pounds to 30 million pounds depending on the circumstances.
Intercontinental Exchange Inc., the second-largest U.S. futures market, and Hong Kong Exchanges were the two parties left in a bidding process announced by the LME in September. Claire Miller, a spokeswoman for ICE in London, declined to comment. The LME said today it would no longer be seeking competing takeover offers.
Hong Kong Exchanges pledged to maintain the LME’s contracts and ring, host to London’s last open-outcry trading. The bourse will continue to be based in London and regulated by the FSA. The Asian exchange also said it would keep the LME’s existing warehousing network, help the bourse develop its own clearing house and freeze trading fees until at least the start of 2015.
The transaction will help the distribution of LME data across Asia and increase the number of customers in mainland China, the London bourse said. Hong Kong Exchanges will also support the expansion of the LME’s warehousing network, which currently consists of more than 600 storage points.
The LME’s board after a takeover would consist of nine directors. Seven of those will have non-executive roles, with two of them chosen from Hong Kong Exchanges’ management. The bourse handled a record $15.4 trillion of contracts last year.
Hong Kong Exchanges is being advised by UBS AG and N.M. Rothschild & Sons Ltd. while the LME hired Moelis & Co.
Brian Marchiony, a spokesman for JPMorgan in London, declined to comment. JPMorgan owns 1.4 million ordinary shares, or 11 percent, and is the biggest shareholder. Sophie Bullock, a spokeswoman for Goldman Sachs in London, declined to comment. Goldman owns 1.23 million, or 9.5 percent.