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Acquisition of LME Poses Challenges to HKEx

07-03 14:49 Caijing
Whether or not HKEx will ultimately fulfill its pledges will depend largely on the internationalization of the RMB in Hong Kong as well as the Chinese mainland’s willingness to open its market to LME.

By staff reporters Wang Xiaolu and Xu Ke

Hong Kong Exchanges and Clearing Ltd. (HKEx) announced June 15, 2012 it has been approved as the preferred bidder for the London Metal Exchange (LME).

Under the framework agreement, HKEx International Limited, a subsidiary of HKEx, will buy all ordinary share capital issued by LME Holdings Limited (LMEH), which wholly owns LME. Upon the completion of the acquisition, LME will become wholly owned by HKEx.

According to the agreement, HKEx will buy LMEH for £107.60 per ordinary share in cash, which implies a value of £1.39 billion based on 12.9 million ordinary shares.

LME’s board of directors have recommended shareholders approve the transaction. LME is a membership-based bourse, hence all board members are also shareholders of the company. Therefore, LME shareholders will almost certainly approve the deal. Meanwhile, since participating bidders have been in frequent contact with the UK’s financial regulator -- the Financial Services Authority (FSA), the FSA will likely approve the deal.

Recently there has been a wave of mergers and acquisitions among exchanges worldwide. As a latecomer in this trend, HKEx looks set to score a victory in its first attempt. Fifteen bidders initially vied for the chance to acquire LME. The last round came down to a contest between HKEx and Intercontinental Exchange Inc (ICE), of which HKEx emerged victorious.

Caijing learned that HKEx won out in the tender mainly by promising to maintain LME’s current business model and refrain from raising transaction fees for three years, which is in line with LME members’ fundamental interests. LME is one of the world's last remaining member-owned exchanges, which means its core members are its shareholders. Hence, for 135 years, the bourse has adopted a business model that “limits profits,” so as to guarantee its members' interests.

LME’s board of directors are also interested in HKEx’s connections with the Chinese market. LME is banking on the fact that as the world’s second largest economy, China’s fast growth will create huge demand for metals and other commodities.

LME spokesman Chris Evans told Caijing that HKEx's acquisition of LME makes it possible for the UK exchange to expand into the Chinese market. China is a major consumer of metals, so the deal is important both to the international metals market and to LME. Evans added that HKEx’s geographical location and expertise in operating exchanges will ensure the success of the acquisition.
 
Due to the special position of exchanges in the financial sector, as well as the sense of sovereignty and national sentiment associated with the transfer of exchanges, cases of successful large-scale mergers and acquisitions among exchanges in recent years have been few and far between. HKEx’s bid for LME also raised concern among the British media. Nevertheless, Hong Kong's position as a former colony of the UK fosters a sense of familiarity between the two parties. The UK’s open financial environment will also facilitate approval of the HKEx-LME deal.

Still, the completion of the acquisition is just the beginning for HKEx, which lacks experience in trading commodities. Whether or not HKEx will ultimately fulfill its pledges will depend largely on the internationalization of the RMB in Hong Kong as well as the Chinese mainland’s willingness to open its market to LME. In addition, HKEx’s competition with major mainland futures exchanges will also affect the central government’s decision-making.

Full article in Chinese: http://magazine.caijing.com.cn/2012-07-01/111921726.html

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