Hot metal

Joint bidders can often get in each other’s way in mergers and acquisitions (M&A). But, the surprise pairing of the London Stock Exchange (LSE) and its Singapore counterpart in a possible bid for the London Metals Exchange (LME) looks powerful. That matters in what is shaping up to be a hot auction.

LSE is already working on a big clearing-house takeover and would struggle to find the cash to meet the LME’s mooted £1 billion price tag on its own. Australia rejected Singapore’s move on its stock exchange earlier this year, so the Asian exchange is probably sold on the value of a local partner. LME might not even open its books to bidders until December, but it’s not hard to see why as many as 10 suitors — likely to include Icap, the CME and Deutsche Boerse’s Eurex — are circling. It’s enjoying record trading volumes, and is one of the world’s few significant exchanges still owned by its members.

 

The talk of a £1 billion sale looks extraordinarily rich for an entity that made net profit of £9.4 million in 2010, representing a price/earnings ratio of more than 100. But, as a member-owned exchange, LME keeps its fees cheap, compared to rivals like CME. These may be artificially low. Current shareholders-cum-users might enjoy the windfall of selling out, and attempt to pass higher fees onto their own customers — although regulators would surely take an interest.

LME is also working on establishing its own clearing business, which would bring in fees and interest income — albeit, at the expense of LCH Clearnet, which LSE is also pursuing. An LME deal would fit with LSE chief executive Xavier Rolet’s stated enthusiasm for post-trade services, financial technology and derivatives. LSE’s finances look solid enough for now, with net debt equal to the Ebitda (earnings before interest, taxes, depreciation, and amortization) at March 31.

But, if it succeeds in buying a majority stake in LCH, perhaps for ¤500 million, its headroom will shrink. As for Singapore, its existing relationship with LME in copper, aluminium and zinc futures should give it some insights into metals trading dynamics, and how LME’s business could be boosted in Asia. Both LSE and SGX have been unlucky in M&A of late. This coalition of the jilted may just land them a deal.