Four big bourses on London Metal Exchange shortlist

 

 

The four exchanges are looking at LME operations in the city ahead of a May 7 deadline to make offers in the second bidding round of a process the 135-year-old bourse kicked off last September, the sources told Reuters.

 

 

"The LME can confirm that it has been hosting a series of meetings with interested parties and that this process is continuing. We cannot name any of the organisations involved due to formal confidentiality agreements," an LME spokesman said.

 

 

The final four have been whittled down from a list of around 15 who had expressed interest last year in the LME, the world's biggest marketplace for industrial metals such as copper, aluminium and nickel.

 

 

The bidders have to win over many shareholders in the member-owned exchange who are smarting over a decision by the LME to introduce a new user fee in the run-up to the sale.

 

 

Until now, the LME has been operating on a constrained profit model, keeping its fees low for the shareholders who use the exchange.

 

 

But some shareholders who had fiercely resisted the possibility of a sale suggested this week they had tempered their opposition to a deal analysts have estimated to be worth around 1 billion pounds ($1.59 billion).

 

 

"At the right price, yes we'd sell our shares, absolutely," said one of the bigger shareholders in the LME. "But we're not naive about what we're replacing."

 

 

The source added that shareholders should realise that another increase in trading fees may be on the cards to maximise revenues for a new owner.

 

 

Smaller shareholders, who could play a decisive role in any vote on a bid because of the way the system is structured, are taking a wait-and-see approach.

 

 

"The process is ongoing and we are making sure that our interests are being safeguarded," Aurubis executive board member Stefan Boel told Reuters this week.

 

 

Boel said late last month that Aurubis, Europe's largest copper producer but a small LME stakeholder, was strongly opposed to a sale of the exchange because a new owner could change a pricing system vital to industrial users' business models.

 

 

Industry sources have said major shareholder banks, the big players, are also opposed to an outright sale and have the clout to block one. They fear such a deal would bring a more heavily regulated owner and hurt their lucrative warehousing businesses.

 

 

"I've heard of some people who are very much against it and others who feel it is inevitable," another large stakeholder said. "It may well be that the tide has turned, but has it turned enough? It's a big turn."

 

 

PLAN B?

 

 

Sources close to the matter say the LME is focusing on a transaction leading to a complete change in control, which would give members a clear view of the value of the exchange.

 

 

But if that fails, some industry sources say a joint venture could be a viable option, with a partner to give the exchange extra firepower to exploit new opportunities Asia.

 

 

"Everyone is looking at the sale process in a binary way - do they sell, do they not sell. There are many other parameters in between," an industry source said.

 

 

"Surely, also there are possibilities of a part-sale. Who would those partners be? A partner would bring value added - it could be technology, or geography."

 

 

Self-clearing is a strong prospect, with or without a sale. The task is now carried out by LCH.Clearnet but the exchange is planning its own clearing house,

 

 

In-house clearing would afford the exchange cash reserves, which would rise with interest rates and create additional revenue from offering the service elsewhere.

 

 

A former LME official said the it needed to develop fruitful partnerships with an Asian exchange.

 

 

"If I were there, I'd promote plan B, forming relationships with a major exchange in Asia," he said.

 

 

"The world of metal revolves around China. I'd love to have a strategic alliance with China. I'd be using my new members to ingratiate myself with the powers that be (in China)."

 

 

A unit of Bank of China, one of China's four big-four state-owned banks, applied for membership of the LME on Wednesday.

 

 

It will be the first bank from China, the world's largest consumer of industrial raw materials, to become a member of the exchange.

 

 

Apart from an outright sale and a joint venture, there is a third option, said a source at a company trading on the LME.

 

 

"Stay independent, keep developing, growing the market, move towards self clearing," the source said.