(Crain's) — CME Group Inc., the world's largest futures-trading company, was bested in its bid to purchase London Metal Exchange Ltd. as rival bidders drove the price above its offer, according to sources familiar with the auction.
CME last week offered to pay 1.2 billion British pounds — about $1.9 billion — to buy LME, but Hong Kong Exchanges & Clearing Ltd. is willing to pay 2 billion pounds or more, according to the sources. CME's exit from the bidding leaves Hong Kong Exchanges to battle one other remaining bidder, IntercontinentalExchange Inc.
A CME spokesman declined to comment. A spokesperson for the Hong Kong Exchange didn’t immediately respond to a request for comment.
CME will miss out on the global growth opportunity at a time when its trading volumes have declined, and it could see LME wind up in the hands of its archrival, Atlanta-based IntercontinentalExchange, also known as ICE.
Still, CME also won't end up paying too much for an exchange that has yet to move into the modern era of electronic trading.
“You're always concerned, as a shareholder, how much is ultimately paid,” said Jim Ginsburg, managing partner of Chicago-based Vernon & Park Capital L.P., which owns CME stock. “Sometimes the winners of auctions ultimately turn out to be the losers.”
LME would have been a nice fit for CME. The Chicago exchange already dominates futures trading in precious metals, including gold and silver. LME operates the world's biggest exchange for industrial metals, such as platinum and copper.
While CME could still start its own trading of industrial metals contracts, it's difficult to build a market from scratch. It purchased its other New York-based metals exchanges, Nymex and Comex.
“There's nothing to stop them from launching those metals on their own,” said New York-based Evercore analyst Chris Allen. “The question is whether you can build the liquidity or not.”
Meanwhile, trading volume at CME has declined every month this year through April, compared with last year.
ICE, the second-biggest U.S. futures exchange company, has been a tough competitor in energy-related contracts, and just this month tried to drive harder into the grain markets by extending its hours of trading. CME responded quickly with an extension of its own hours. A spokeswoman for ICE declined to comment.
“Certainly there's a risk that anybody who acquires the LME can become the dominant player in the metals arena,” Mr. Ginsburg said. “They're a major player, and how does that play out on somebody else's platform?”
LME still operates its exchange mainly by way of floor trading, as opposed to electronic trading, and keeps a network of warehouses for possible physical delivery of the commodities traded on its exchange.
In an update today, LME said it had narrowed the field of potential buyers to two, though it has said that it may not sell the exchange at all. Ultimately, three-quarters of its owner-members must approve any deal, and some have been loath to leave behind their traditional way of trading.
LME said in the update that it's seeking a “detailed understanding” of the remaining bidders' “plans for the future governance and operation of the market and the deliverability of their respective proposals, as well as the value offered.”
The silver lining for CME shareholders may be that the company increases a special dividend payout next year. The company initiated an “annual variable dividend” this year of $3 per share, in addition to its regular dividend, and said the new annual dividend would fluctuate in the future depending on, among other things, the amount of capital spent on acquisitions.
Keefe Bruyette & Woods analyst Niamh Alexander said in a research note today that she believes CME being out of the bidding for LME “increases the likelihood” of another annual dividend next year of at least the same size.
Separately, CME announced today that it has hired Susan Schultz to the newly created position of executive director and counsel to the executive chairman and president. Terry Duffy is currently the executive chairman and president. She was most recently a deputy general counsel and chief operating officer for the LCA division of Newedge USA LLC.
The company also hired Linda Rich as senior managing director of government relations and legislative affairs. She was most recently the senior vice president for government relations at rival exchange operator NYSE Euronext.
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