LME opens door to potential $1.5 billion

LONDON Mon Sep 26, 2011 2:24pm BST

Men walk past the London Metal Exchange (LME) in London, July 22, 2011. REUTERS/Paul Hackett

Men walk past the London Metal Exchange (LME) in London, July 22, 2011.

Credit: Reuters/Paul Hackett

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LONDON (Reuters) - The world's biggest metal market has thrown open its doors to a potential 1 billion pound ($1.5 billion) takeover and is considering a sale that might end the independence its chief executive previously said was not negotiable.

The London Metal Exchange (LME) said on Friday it was considering a sale after receiving "several expressions of interest." A source with knowledge of the situation said there had been a firm offer, which had triggered the beauty parade.

LME members speculated that likely suitors might include CME Group Inc (CME.O), the largest futures exchange in the United States, and IntercontinentalExchange (ICE.N).

"Potentially it could be CME or ICE. There's also Singapore (Singapore Exchange (SGXL.SI)) or the recently launched Hong Kong Mercantile Exchange, both of them have the money. There's also Eurex owned by Deutsche Boerse (DB1Gn.DE)," the head of a metals brokerage said.

He said that the LME's CEO, Martin Abbott, "has said many times he wants the exchange to remain independent. It (a takeover) is probably being considered because the members want it, the biggest shareholders want it."

The LME was established in 1877 above a London hat shop.

Its building on Leadenhall Street in the City financial district is one of the last bastions of open outcry, with futures in metals including copper, aluminum, zinc, lead, tin and nickel still changing hands in so-called ring trading as well as electronically and over the telephone.

Trading houses and banks that use the market also own it and therefore the fees are kept low, which means profit levels have been modest.

Major LME shareholders include companies such as U.S. banks Goldman Sachs (GS.N) and JP Morgan (JPM.N) and trading firms including Amalgamated Metal Trading and Metdist.

Market sources said any bid would probably have to be at least 1 billion pounds as 800 million pounds was reportedly offered for the company in 2008.

As an indication, dividing 800 million pounds by the 14.851 million "A," or ordinary, shares in issue would imply an offer price of 54 pounds a share.

The last bid for "A" shares of the private company LME Holdings Limited on June 23 was at 5.50 a share and the last offer for "B" shares was at 78 pounds on August 5.

"It will have to be at a sufficiently attractive level to meet all of the shareholders requirements," said a shareholder.

"We have a unique business model...this is a very valuable part of our business and I doubt very much anybody is going to allow it to go for a song."

UBS Investment Research said in a note that a 1 billion pound price tag appeared rich.

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The LME, which accounts for 80 percent of traded volume in global metal futures transactions, saw record trading volumes last year of 120 million lots equivalent to $11.6 trillion and 2.8 billion tonnes of metal.

Pre-tax profit in 2010, limited by the low fees, fell 28 percent to 12.5 million pounds.

CME Group, the largest futures exchange in the United States, has in recent months appeared to distance itself from a takeover, and a spokesman said on Friday it did not comment on rumors.

But the sources said on Monday that CME has approached the LME before, and that it is a likely contender this time.

"Well CME is the obvious one. If you can't beat 'em, buy 'em. It has got to be someone with a significantly large enough wallet to do the job," the head of an LME member company said.

ICE declined to comment, and the SGX said it does not comment on market rumors.

Two metals trading sources said a firm bid was unlikely to come from an Asian exchange.

"It doesn't take a genius to figure out who it's going to be," the shareholder said. "But is there a firm bid on the table? Not that I've seen as yet. It's very early days."

UBS said CME already had an existing metals business, while ICE had limited exposure to metals but had demonstrated its willingness to diversify its offerings.

The LME board is due to gather on Friday for a previously scheduled meeting.

"The members...they'll all have to be convinced. But with the situation at the minute and some companies short of cash -- to sell those A shares at a premium in this environment, that's got to be attractive," the head of the LME member company said. "It's clever timing."

($1 = 0.648 British Pounds)

(Reporting by Susan Thomas; Additional reporting by Luke Jeffs, Sylvia Antonioli and Melanie Burton; Editing by Anthony Barker)

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