HKEx taps $800 million equity funding, gets FSA nod for LME

Thu Nov 29, 2012 8:17am EST

Related Topics

* HKEx offers new shares at discount of up to 7 pct to Thursday's close

* Two more hurdles for HKEx proposed $2.2 bln LME purchase

* Deal expected to become effective around Dec. 6

By Fiona Lau and Denny Thomas

HONG KONG, Nov 29 (Reuters) - Hong Kong Exchanges and Clearing Ltd is raising about $800 million to fund its takeover of the London Metal Exchange (LME), tapping equity markets minutes after receiving approval on Thursday from Britain's Financial Services Authority for the acquisition.

The proposed $2.2 billion takeover of the LME marks the biggest foray for HKEx, the world's No.2 exchange operator by market value, as it looks to expand beyond its traditional business in stock trading.

Approval from the British regulator leaves HKEx with only two more hurdles to closing the transaction. HKEx said in a securities filing a court hearing to approve the deal and confirm capital reduction were expected on Dec. 5, after which it would become unconditional and take effect the next day.

To fund part of the acquisition, HKEx is offering new shares in a range of HK$116.1-HK$119 each, IFR, a Thomson Reuters publication, reported, citing a term sheet of the deal. The price is equivalent to a discount of up to 7 percent to Thursday's close of HK$124.80.

Deutsche Bank AG, HSBC, UBS AG were hired to manage the share sale, IFR added.

The acquisition has been hailed by HKEx Chief Executive Charles Li as "transformational", giving the Hong Kong bourse operator access to the 135-year-old LME, where trading of copper, aluminium, nickel and other metals is still conducted with arcane hand gestures and screaming traders.

Li, the former JPMorgan China chairman, said last month he wants to expand the LME's product offering beyond base metals to iron ore, coking coal and iron ore shipping.

Another ambition will be opening LME warehousing in China, the world's top consumer of copper, which Li hopes will be achieved in the context of China's efforts to open its capital markets, including paving the way for international use of the renminbi currency.

He has acknowledged that metals warehousing was a thorny issue and that he wanted to "get his arms" around a problem that has dogged the LME in recent years.

LME regulations allow companies operating warehouses in the global network registered by the exchange to release only a fraction of their inventories each day.

This, along with financing deals, results in long queues for metal and an artificial tightness in immediate supply that has pushed up premiums, the amount paid above the spot price to secure physical delivery, infuriating metals consumers.

NOSTALGIC

On the 135-year old institution's structure Li has said a new users committee will be created, involving senior figures from the manufacturing sector including fabricators.

That committee will report directly to the new LME board, which should come into effect next week, depending on the final two hurdles.

"Of course I'm nostalgic about this changing. But we close one door and open another one, a very exciting one," said Sucden Financial Chief Executive Michael Overlander, who began his career on the LME in 1971, and joined Sucden two years later.

"This is a win win situation for everybody. The shareholders have been dealt with very fairly, all the employees of the exchange have been looked after and a new era is starting," said Overlander, who will step down as an LME board member, as will the other industry practitioner board members.

The new LME board will comprise five directors, including one executive director and four non-executive directors. Two of the non-executive directors, including the chairman, will be independent and two will be current senior HKEx management.

The five directors will also sit on the board of LME Limited, which will remain a recognised investment exchange based in London and supervised by the FSA.

Some analysts had voiced concern HKEx may be over-paying for the LME, which made a net profit of just 7.7 million pounds last year due to the constrained-profit model treasured by the metals plants and traders who make up the smaller shareholders.

Concerns about the big price tag had weighed on the company's share price earlier this year, but they have risen around 24 percent since early September, outperforming a 14 percent rise in the benchmark Hang Seng share index.

HKEx stock ended up 0.4 percent at HK$124,800.

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