After three rounds of bids running for more than a month, Hong Kong Exchanges and Clearing Ltd (HKEX) beat out Intercontinental Exchange to win the London Metal Exchange (LME) at the higher-range estimate of HK$16.7 billion, making a meaningful step in ‘going out’. As the saying goes ‘A small step today makes a giant leap tomorrow’, HKEX acquired the bourse for long term development at a consideration 180 times of price-earning ratio based on the profit after tax of 7.68 million pounds in 2011. Such move shows HKEX’s ambition to expand global metal trading market and its desire to establish metal settlement platform in near term and launch yuan products in phases to fully seize the business opportunities in financial and metal commodity market in China.
Some insiders believe that the 1.388 billion pound deal was overly priced compared with other bourse acquisitions in recent years, but analysts are generally positive on the deal of the world’s largest metal trading bourse making a record US$1.54 billion in turnover last year, which showed its outstanding market position. Based on LME’s trading volume of 150 million futures contacts last year, the trading fee, which has now risen to US$0.79 each, would have made annual average marginal revenue of US$120 million. The deal would help HKEX generate long term cash revenue, offsetting the decline in recurring gains due to the shrinkage in daily turnover and downsize in newly-listed shares on HKEX. Moreover, LME is the world’s leading bourse in basic metal futures and option contracts trading with a size exceeding US$15 trillion, making up 80% of market share. Upon the completion of the transaction, HKEX can introduce LME to other new Asian league so as to diversify the membership portfolio of the metal exchange, a move favorable for both bourses.
Here comes the in-depth meaning of the deal: the formation of global financial strategic alliance arising from China-Hong Kong market interaction. China acquired 40% of non-ferrous metal in the world, representing 60% of futures transaction on LME. LME, controlling the supply chain of the non-ferrous metal trading in China or even the world, to a large extent dominates the development of commodity trading market in China. China, as an important buyer, intends to lower the risks on metal price volatility and become a more aggressive player in the market; it also aims to accelerate yuan internationalization through this sizable transaction. On one hand, the deal helps China lower global metal price volatility by futures trading and have more say in commodity trading. One the other hand, the expansion in commodity trading would make yuan as a currency for commodity trading and international reserves, probably leading to early opening of projects under capital account in China. Therefore, the acquisition fulfills the financial goals and needs of China and Hong Kong and puts their capacity into full play.
LME finally discarded Intercontinental Exchange, which is geographically closer, as HKEX will reserve LME’s business mode, including the operation of settlement unit; therefore, the bourse will continue to come under the supervision of U.K Financial Services Authority in near term. Although the deal had been passed by LME’s shareholders and is scheduled to be completed in the fourth quarter this year, the unchanged business mode will hardly bring synergies as expected in near term. Moreover, LME used to pass the settlement procedures to the third party clearance company as LME doesn’t has its own clearing house. Such high settlement fee will likely erode LME’s revenue. No matter how future efficiency would be, HKEX needs to pay acquisition costs under the framework agreement by cash in hand and at least HK$13.2 billion bank loan facility. The management of HKEX said the remaining consideration may be financed by new share issue and debt refinancing in the future. The stock price of HKEX will continue to be weighted down in near term by theses financing needs and arrangement, and in long term it will depend on how the acquisition would bring quantitative and concrete earnings for HKEX.