The problem: the exchange boss assumed the historic metals exchange wouldn’t come up for sale.
The exchange had been talking to shareholders, along with Asian users of commodities, for some time, with many of those talking up the 135-year-old London exchange. Convinced that it would not become available, the HKEx management team, led by Li, set their focus on organic growth.
Then, in September last year, LME chief executive Martin Abbott announced that it had received multiple approaches from unnamed potential bidders, the first of which is understood to have come from Atlanta-headquartered commodity derivatives exchange IntercontinentalExchange.
In the same statement, Abbott announced that Moelis & Co had been appointed to advise the board. Caroline Silver, the exchange specialist at Moelis, had earlier worked on the restructuring of LCH.Clearnet, where Martin Abbott is a board member.
The LME sought to make it clear to its members that a sale wasn’t guaranteed, but that the price ranges being suggested in discussions with would-be bidders were such that the LME board, together with their advisers, had to consider whether any proposition was recommendable.
For the HKEx, an acquisition of the LME represented a unique opportunity to acquire, in one stroke, a position of global leadership in the commodities market.
The LME’s announcement fired a starting gun for members of the small world of exchange M&A specialists, many of whom have worked alongside or opposite one another on numerous occasions.
Ice was being advised by JP Morgan, with Jeremy Capstick, who in 2010 advised Climate Exchange on its GBP 394.6m sale to the commodity exchange, leading for the US bank in London, with Joe Molluso involved in the US.
When the LME first notified members of a potential sale process, JP Morgan had a relatively small stake in the metals exchange, before then acquiring in November last year a stake from the administrator of MF Global’s UK arm, becoming the LME’s biggest shareholder in the process.
Rothschild, which had in 2007 advised the LME board on a share scheme arrangement to facilitate membership, won the mandate to advise HKEx, with Stephen Fox and Philippe Le Baquer leading on the deal.
Fox, like Moelis’s Silver, also had a recent connection to Abbott, having provided a fairness opinion to the LCH.Clearnet board on the sale of a 60 percent stake in the clearing firm to the London Stock Exchange in early 2012.
CME Group, the US’s largest derivatives exchange, turned to its long-time advisers at Barclays, with Joel Fleck leading in the US, and Ben Davey bought in to work on the deal in the UK.
Also on the advisory mandate was Bank of America Merrill Lynch, with Kaivan Shakib, who in 2011 had advised Nasdaq on its joint bid with ICE for NYSE Euronext, leading for the US bank.
NYSE Euronext, meanwhile, appointed Blackstone, to the surprise of some of its rival bidders.
Goldman Sachs, which is one of the LME’s biggest shareholders and in Stephen Branton-Speak, who runs its metals trading business on the commodities desk, has a representative on the board of LME Holdings, decided to make itself unavailable for any advisory work.
The months that followed that September were taken up with groundwork, as Moelis gathered information and notified all would-be acquirers of the LME’s position, with information sent out to the more than a dozen interested parties who had signed non-disclosure agreements just before Christmas.
In a process that ran concurrently, Silver and her team canvassed members identifying their concerns. First-round bids were received in the second week of February, with Moelis then working to narrow down the list of bidders.
Shortly thereafter, UBS, which also has a sizeable stake in the LME and had been advising a party that decided against a first-round bid, was added to the HKEx advisory line-up, in part due to its long-lasting financing relationship with the exchange.
When HKEx announced its deal for LME, UBS was named as one of the banks that had agreed to support at least GBP 1.1bn in short- and long-term loan facilities to the exchange.
Binding offers to buy the LME were then received on May 7, with the LME board meeting to discuss the bids a couple of days later. NYSE Euronext was eliminated from the sales process in the days following, after it became clear it had been priced out of a deal.
CME Group was next to drop out of the bidding, having declined to improve its bid, leaving the final two bidders: HKEx and Ice.
By the time the LME board met on Wednesday June 13 to make a final decision on which bidder it would back, the two bids were almost indistinguishable from a financial perspective, while both parties had made similar commitments to leave the exchange relatively untouched.
As such, the LME was faced with two clear propositions. The HKEx bid presented the LME with an opportunity to tap into the long-term growth of Chinese demand, as and when Chinese markets open up, while the Ice bid offered an almost instant solution to one of its primary concerns: clearing.
It quickly became clear that the HKEx’s offer was the preferred option, with its proposal enabling the LME to develop a bespoke in-house clearing platform, while providing infrastructure to support the future clearing of renminbi products. More importantly, the bid offered a route to growth in Asia.
The LME and Moelis acted swiftly, making it clear to HKEx that it was the preferred proposition, and that it had to increase its bid accordingly, so as to be the highest bidder.
Within 36 hours, HKEx’s recommended offer had been announced. The HKEx final bid of GBP 1.388bn was chosen to reflect the HKEx’s stock exchange ticker, ’388 HK’.
Having had it made clear from the outset that a sale wasn’t inevitable, the LME’s shareholders will pass formal judgement on the bid with a final decision on whether to accept due before the end of July.
Category: Hong Kong