LONDON Market parties are jockeying ahead of a sale of the London Metal Exchange (LME), a deal that could radically alter the sway that banks and brokers hold over the world's largest metals market.
One faction within the 130-year old exchange favors a sale to the IntercontinentalExchange (ICE) (ICE.N) from the United States, one of the parties to first express an interest in buying the LME last year.
The combination of ICE, the main European energy market, with the dominant industrial metals venue would create a strong commodities exchange group at a time when Asian markets look set to dwarf their European rivals, analysts say.
"ICE don't have a metals complex on their platform so in theory they've got lots of people who trade there currently that they will be able to access and develop their business from," said a source at a company that owns shares in the LME.
And one source at the LME said a tie-up with ICE "makes a lot of sense."
But a sale to ICE could run counter to the interests of top bank shareholders in the LME, who fear any new owner would bring more heavy regulation, and hurt their lucrative warehousing business.
The LME, which has one of the world's last open-outcry trading pits, received an initial approach last year which prompted it to open the field to other potential suitors. A sale could fetch it around 1 billion pounds ($1.5 billion).
It is weighing up some 15 bidders, thought to include commodities powerhouse the CME Group Inc (CME.O), the London Stock Exchange (LSE.L), UK-based broker ICAP (IAP.L) and Deutsche Boerse-owned Eurex (DB1Gn.DE).
Asian players keen to expand into Europe include the SGX Singapore Exchange (SGXL.SI), the Shanghai Futures Exchange and the Hong Kong Mercantile Exchange.
The LME, which accounts for 80 percent of global futures activity in industrial metal, is set to pick a shortlist of bidders entering a second round at a board meeting at the end of February.
It said on Thursday that there was no preferred bidder. Any offer would have to be approved by stakeholders owning 75 percent of shares.
The LME's top shareholders include J.P. Morgan (JPM.N), Goldman Sachs (GS.N) and Barclays Capital (BARC.L), who have invested heavily in physical metals business and beefed up their trading teams and financing operations.
Between them, they could amass enough support to block a sale if they were worried that ICE and CME's stricter U.S. regulators could threaten their business.
"The bigger shareholders would not be in favor of ICE, especially with regard to regulation," a source at a trading company said.
Therefore, any bidder will not only have to offer a full price for the LME to persuade its hundred or so shareholders to part with the exchange, but will also need a viable plan for its future.
"ICE is attractive to LME, but at the end of the day it comes down to pricing," the shareholder source said. "They also have to win over the shareholders."
"I'm not so concerned about who buys the LME," a third industry source said. "I'm more concerned about a change in the way the LME is run. It needs to be modernized."
LME Chief Executive Martin Abbott said last year talk about its plans to set up its own clearing - and take it away from LCH.Clearnet - propelled it into the spotlight "because that's where lots of people see what's of value."
ICE Chief Executive Jeffrey Sprecher has told Reuters the company, whose products include Brent curde and gasoil futures, is looking at potential acquisitions to expand in clearing, adding that the LME could add value.
But Abbott himself dampened expectation the LME would be sold quickly or easily, saying at his annual news conference this month it may well be that shareholders will not want to part with their shares given their "complex relationship with the value of the exchange."
"I'm not prejudging the outcome of the bid process," he said, "but the only safe way to run the exchange at the moment is to assume that this time next year we'll be holding this press conference under the guise of the LME."
(Editing by William Hardy)