Derivative Giants Bid for LME - Analyst Blog
February 17 2012 - 7:45AM
Zacks
The Financial Times reported that the US derivative exchange
giants – NYSE Euronext Inc. (NYX), CME
Group Inc. (CME) and IntercontinentalExchange
Inc. (ICE) have submitted their bid for London Metal
Exchange (LME). Including these firms, about 15 companies have
shown interest in the first round of preliminary bid that started
off in September last year and closed yesterday.
Founded in 1877, LME is the world's largest futures exchange,
which offers futures and options contracts on base and other
metals, which include aluminium, aluminium alloy, NASAAC (North
American Special Aluminium Alloy), cobalt, copper, lead,
molybdenum, nickel, steel billet, tin and zinc.
LME is owned by 93 members, the top most shareholders being
JP Morgan Chase & Co. (JPM) and
Goldman Sachs Group Inc. (GS) with 10.9% and 9.5%
stakes, respectively, along with Barclays Plc
(BCS) and Citigroup Inc. (C). LME is also one of
the last member-owned exchanges in the world wherein trading is
conducted through the open-outcry system in the ring by the ring
dealing members. In addition to the 12 companies who have exclusive
rights to trade in the ring, around 100 companies are involved in
the LME in total.
As the LME offers contracts with daily expiry dates of up to
three months from the trade date, along with longer-dated contracts
up to 123 months, it also allows for cash trading. Furthermore, it
offers hedging, worldwide reference pricing and the option of
physical delivery to settle contracts.
Accordingly, the bids made by NYSE, IntercontinentalExchange and
CME estimate valuations worth £1.0 billion ($1.57 billion),
signifying more than 15 times the last traded price before the sale
process began. While the value of IntercontinentalExchange’s bid
remain veiled, the company appointed JP Morganas its advisor for
the bid.
While Deutsche Boerse and London Stock Exchange stayed out of
the preliminary bid, the board of LME is expected to mull over the
bids on February 23, 2012.
Scope of Growth for Derivative Giants
After the collapse of its merger deal with Deutsche Boerse, NYSE
has shown significant interest in LME as this metal exchange’s
business blends well with NYSE Liffe’s soft and agricultural
commodity derivative business. NYSE Liffe is the former London
International Financial Futures Exchange, which trades coffee,
sugar, cocoa and wheat futures. While LME and NYSE Liffe already
share the same storehouses for delivery of commodities, the
combined trades could be cleared at NYSE Liffe Clear, which is
currently at a nascent stage of growth. Hence, this effort should
pave way for a new earnings opportunity, if the deal
materializes.
On the other hand, addition of LME to CME’s basket could enhance
its metals exchange, Comex. Hence, the deal is also considered
important for other derivative exchanges, such as CME and
IntercontinentalExchange, in order to boost their competitive
strength in Europe.
While the owners of LME are apprehensive about safeguarding its
business model, we believe the complex structure of its futures
contracts and its network of registered warehouses could pose some
issues in the business sale.
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
NYSE EURONEXT (NYX): Free Stock Analysis Report
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