JPMorgan in exclusive talks with Mercuria on commodities sale

By Dmitry Zhdannikov

LONDON (Reuters) - Fast-growing trading house Mercuria, led by two former Goldman Sachs executives, emerged as the front-runner to buy the physical commodities unit of JPMorgan , one of the most powerful oil and metals desks on Wall Street, two sources told Reuters.

JPMorgan decided to sell its multi-billion dollar physical commodities division last year under rising regulatory scrutiny and political pressure on banks to retreat to their core business of lending instead of speculating in raw materials.

In recent weeks, Mercuria was competing with Australian bank Macquarie Group and private equity manager Blackstone Group LP to buy JPMorgan's unit, sources has said.

"This week, JPM entered into exclusive talks with Mercuria," one of the sources familiar with the process told Reuters.

The final deal could take a few months to conclude, one of the sources said. The deal, if agreed, would catapult Mercuria into the top tier of trading houses with Glencore Xstrata , Vitol and Trafigura .

Private and lightly regulated trading houses have benefited most from a major retreat by banks from commodities trading over the past two years.

Companies like Glencore and Russian oil major Rosneft hired whole teams of traders from banks such as Morgan Stanley but Mercuria could become the first trading house to absorb an entire physical division from a bank.

JPMorgan and Mercuria both declined to comment.

Mercuria was founded by Marco Dunand and Daniel Jaeggi, who both worked as executives at Goldman Sachs and then trading house Sempra, which was later bought by JPMorgan from the Royal Bank of Scotland .

In less than a decade, Dunand and Jaeggi have built Mercuria from a relatively small trading house into one of the world's largest oil traders with annual revenues of around $100 billion and 700 traders around the globe.

The deal value has yet to be agreed and will depend to a large extent on the valuation of large stockpiles of oil and metals the bank holds, one source said.

In documents circulated to potential buyers, JPMorgan valued its physical commodity business at $3.3 billion, with an annual income of $750 million. JPMorgan paid nearly $2 billion to buy the largest part of the business from RBS in 2010.

(Reporting by Dmitry Zhdannikov, Oleg Vukmanovic, Veronica Brown, Henning Gloystein and David Sheppard; Editing by William Hardy and Peter Graff)