Analysis: LME single but happy amid exchange merger fervor

LONDON Thu Mar 31, 2011 5:59am EDT

Telephone cables get tangled as brokers take telephone bids during trading on the floor of the London Metal Exchange in London in this January 7, 2004 file photo. REUTERS/Russell Boyce

Telephone cables get tangled as brokers take telephone bids during trading on the floor of the London Metal Exchange in London in this January 7, 2004 file photo.

Credit: Reuters/Russell Boyce

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LONDON (Reuters) - The return of blockbuster takeovers in the exchange industry has put the spotlight back on the London Metal Exchange, but its tightly held, member-run structure means it is likely to remain independent for now.

Five big exchange mergers are in the works globally, with three of the bids launched in a dizzy few weeks this year.

At first glance, the LME, the world's largest non-ferrous metals exchange for futures and traded options, looks like a tasty business for a potential acquirer.

Last year when metals prices rose strongly, a record 120.3 million lots traded on the LME at a total notional value of $11.6 trillion, up around 60 percent from the year before.

Over the years there have been numerous takeover rumors, but the 131-year-old LME remains single and happy.

"People will always say, 'Well how come the LME is still on its own?'," said Michael Overlander, chief executive of broker Sucden Financial and an LME board member.

"Are people beating paths to the doors of the LME? No, I don't believe that's the case. People don't totally understand the LME."

CO-OPERATIVE

The LME operates almost like a co-operative, in which members own the exchange in which they trade.

"Membership is their entree into trading. They are more focused on the business at hand, rather than the underlying value of what lies beneath the exchange," Overlander said.

Shares can be sold only to other members, giving those involved in the business a direct say in how it's run.

"The LME is quite a unique market, which serves its members. It's a combination of being a futures market and physical forward market and has a daily prompt system," said Credit Agricole analyst Robin Bhar.

"The money it makes, it puts back into the exchange ... It's almost a non-profit making venture."

The LME generates revenue in various ways, including contract levies, data sales and physical operation fees. But it's the brokers who make the real money by trading on it.

"We deliberately keep our fees low because we're a member-owned organization," said LME spokesman Stephen White.

Members charge their clients brokerage fees that vary depending on the deal. The LME charges 17 pence per lot for a normal member trade, a 5 pence client trade per lot, and a 3 pence charge per lot for data capture.

Its 2009 financial statements, the latest available, show the LME is a modest-sized operation, with profit of 13.56 million pounds ($21.8 million) and revenue of 43.59 million.

It has pushed into new growth areas, particularly into the London bullion business, and last month it tied up with the Singapore Exchange to launch small-size, cash-settled metals futures.

"It's well run, and what it does, it does well," Bhar said.

"But it's not a money spinner, and it's not intended to be a one. Therefore any acquiring company is going to have to ask itself how does it make more money out of acquiring the LME?"

By selling the LME and opting for a one-off windfall, members could lose their control of the exchange and the way it does business. A new owner would be setting fees and could be tempted to raise levies to cash in on the huge volumes.

To buy the LME a suitor would first have to win the support of 75 percent of the members to agree to alter the LME articles in order to sell the shares. "It's kind of a big fence to jump," said a source at the LME.

But it's not an impossible hurdle.

In 2001, the IntercontinentalExchange bought the member-owned International Petroleum Exchange, Europe's largest energy exchange.

"If someone put a number in there that is going to make people sit up and say, 'Wow! This is a gold mine I'm sitting on', then obviously it would be daft for anybody to say the LME is never going to be sold," Overlander said.

However, it seems any potential acquirers who have been tempted to take a closer look have been put off or shown the door.

Overlander said he knew of no LME members agitating to put the exchange up for sale or of any outside pressure on members.

"I reckon I'm relatively close to the exchange and I would be very surprised, certainly as a director of the exchange, if the board is not aware of them, and I know of no bids," Overlander said.

In one of the first speeches of his tenure, LME Chief Executive Martin Abbott said: "There is no 'For Sale' sign hanging over the LME."

More than four years later, the line is still an implacable: "The LME has no plans to change its independent status."

(Editing by Jane Bairdx)

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