HONG KONG/LONDON The Hong Kong stock exchange agreed to pay 1.4 billion pounds ($2.2 billion) to buy the London Metal Exchange, a British institution and the world's biggest marketplace for industrial metals, underscoring the global shift in manufacturing to Asia.
The deal on Friday - still subject to approval by LME shareholders, who may well reject it - would give Asia's largest bourse a much-desired commodity trading platform and brings LME members closer to China, the world's biggest metals buyer.
"This is a transformational milestone for Hong Kong," Hong Kong Exchanges and Clearing (0388.HK) Chief Executive Charles Li told a presentation for analysts.
At the 135-year-old LME, besuited men and some women still use arcane hand signals to conduct open outcry trade in copper, aluminum, lead, nickel, tin and zinc around a circular floor in a plain building on Leadenhall Street, near the Bank of England.
Many shareholder members who own and use the exchange, which dates from a time when Britain and not China was the workshop of the world, have feared a sale might alter its unique, complex structure of futures trading and low fees.
Li promised that until at least January 1, 2015, HKEx will preserve the LME brand, the open-outcry and the structure.
Until the same date it will also refrain from increasing fees for contracts currently traded on the LME, beyond levels that kick in next month. HKEx said the acquisition would add to earnings after three years.
Due to the lopsided spread of shareholdings, the deal could fail if many small shareholders oppose the bid, which has to be approved by 75 percent of shares and 50 percent of shareholders.
HKEx said it was "reasonably confident" of success in the LME shareholder vote, which the LME said was likely before the end of July. [ID:nL5E8HFBT3] If approved, the deal will close in the fourth quarter.
"There may be a few shareholders who are unwilling to sell, the real issue is, either through colluding with each other or building momentum, can they get above 25 percent. It's possible, we don't know," Romnesh Lamba, head of market development, said.
HKEx beat U.S. commodities exchange InterContinental Exchange (ICE.N) in the final nail-biting stages of a contest that began in September with around 15 expressions of interest.
"Everyone is pretty relieved," said one LME floor trader. "But some people still view it as the glass half empty, and that the floor will close on January 1, 2015."
The floor tradition is prized for accurate price discovery although business is also done electronically and by telephone.
"You have the biggest exchange, the biggest market and a lot of inefficiency," said Li, a former journalist and JPMorgan China banker, celebrating the win and the 12th anniversary of HKEx's listing. "We as HK exchange are trying to breach that."
The LME board backed the Hong Kong bid.
Gavin Prentice, managing director of Marex Spectron and also an LME board member, said: "We are pleased with the result. Marex Spectron fully supports the LME board's unanimous recommendation."
In Hong Kong, there were celebrations.
"ICE was a fantastic runner up and they fought the good fight, but the lure of all things eastern is what won it in the end," Sucden Financial Chief Executive and LME board member Michael Overlander said as he left the HKEx celebration party.
"I'm here in the reception and its buzzing in there, people are congratulating each other and slapping each other on the back. They really think they have got themselves a jewel in the crown," Overlander said by telephone from Hong Kong.
For the LME, HKEx offers a fast track into China and will strengthen its position in the major market against the Shanghai Futures Exchange, which trades in base metals.
The London exchange has long sought to win approval from China's regulators to list its warehouses nearer customers in the country which accounts for 40 percent of copper consumption.
HKEx Chairman Chow Chung Kong said it was preparing to set up metal warehouses in China and launch products using the renminbi currency. "This will have huge benefits for mainland companies in terms of risk management," Chow said.
Lamba of HKEx said that any worries about possible Chinese government meddling were misplaced.
"Can we access China without the baggage of undue influence of China trying to control us? That's really the question. And we believe the answer is a firm 'yes' because that is how we have grown as an exchange for the last 15 years," he said.
HKEx will finance the acquisition of the exchange, where total traded value was $15.4 trillion last year, through its existing funds and with a 1.1 billion pound bank loan.
Some analysts have voiced concern HKEx may be over-paying for the LME, which made a net profit of just 7.7 million pounds last year due to its constrained-profit model.
"The price is higher than some were expecting...," said Sam Hilton, analyst at investment bank Keefe, Bruyette & Woods.
"Investors are more likely to be negative on this news, but that's partly because the bears have been very negative whereas the investors who are positive on this deal are at best lukewarm," he said.
Concerns over the hefty price tag have partly weighed on the Hong Kong company's shares, with the stock down 9.4 percent this year, compared to a 4.3 percent rise in the benchmark Hang Seng index .HSI..
The LME shareholders that the bidder will have to win over include big banks Goldman Sachs (GS.N) and JP Morgan (JPM.N), commodities giant Glencore (GLEN.L), small metals brokerages, mining companies and industrial users.
"There's all sorts of upside if it happens, expanding the market into Asia, perhaps 24 hour clearing and execution...but I don't know which way people are going to vote," said Malcolm Freeman, sales director Europe for INTL FC Stone, an LME member firm.
Moelis & Co were advisers for the LME, Rothschild and UBS for HKEx.
(Additional reporting by Lawrence White, Alison Leung, Melanie Burton, Eric Onstad, Maytaal Angel, Silvia Antonioli and Luke Jeffs; Editing by Michael Flaherty, Ian Geoghegan, Anthony Barker)
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