Unlucky once, U.S. trader Freepoint still open to deals

NEW YORK Thu Nov 7, 2013 10:33pm EST

NEW YORK (Reuters) - U.S. merchant Freepoint Commodities is still open to potential trading asset acquisitions after losing out on one deal this year, Chief Executive David Messer said, signaling he may yet take part in the industry reshuffle.

However, Messer told the Reuters Commodity Summit this week that he was unlikely to return to the metals warehousing business, beset by regulatory scrutiny and profit pressures, and will eschew the balance-sheet-heavy operations being shopped by banks in favor of more niche opportunities.

"I think that if we thought we could acquire an asset at the right value, we would be open and enthused to do that," he said at the summit, held at the Reuters office in New York.

"It's just a question of what assets out there fit our strategy. We've looked at some number of the platforms for sale, we've actually bid for one, but today we haven't acquired any," he said. He declined to say which one he had bid on.

The commodity trading landscape is in the midst of its biggest reshuffle in a generation, with U.S. and foreign banks and some corporates getting out of the business while new players line up to get a foot in the door.

At least two of those processes are still ongoing. JPMorgan Chase & Co (JPM.N) has only recently taken first-round bids for its physical trading operation -- the bulk of which is the former Sempra Commodities business that Messer once ran. And Morgan Stanley (MS.N) is expected to hold off concluding a deal until a Federal Reserve decision about its business.

Messer said he would "probably not" be buying a metals warehouse such as JPMorgan's Henry Bath & Sons, a company that he ran for years. The owners of London Metal Exchange warehouses are embroiled in regulatory and legal battles amid allegations that they may have inflated prices.

Messer, who began his career as a trader at Drexel Burnham Lambert in the early 1980s, has in less than three years built Freepoint into a 230-strong global commodity merchant modeled on -- and largely staffed by former traders from -- Sempra Commodities, the trading house he ran for 12 years until 2009.

Unlike Sempra, which was a broad energy and metals trading operation with a heavy focus on natural gas, Freepoint is seeking out more niche plays, often in the oil sector, he said.

Nor will Freepoint -- which was launched with backing by private equity fund Stone Point Capital -- be seeking to pick up the kind of multi-year, long-dated power or gas trades that are bread and butter for many banks.

"It's just that certain kinds of businesses don't fit our strategy - if it's a heavy balance sheet business, that's not going to fit what we do," he said.

Meanwhile competition for assets amid the U.S. shale boom remains intense among corporations, particularly those who enjoy tax advantages such as master limited partnerships (MLP).

On Wednesday, a little-known MLP named NGL Energy Partners LP (NGL.N) bought U.S. energy logistics and trading firm Gavilon LLC for $890 million. Hetco, Hess Corp's (HES.N) joint-venture proprietary physical trading shop, was also put up for sale back in March. A deal is expected soon.

PUSHING CAPITAL

Messer set up Freepoint with dozens of his former colleagues two years after leaving the group in the hands of RBS, which had bought half of the firm from Sempra Energy (SRE.N) in 2008. RBS was forced to divest shortly thereafter and sold most of it to JPMorgan -- which has now put it up for sale again amid pressure to get out of the physical trading.

While Messer's previous ventures have focused on trading and supply deals, this time around he is funding development projects, often together with a lender, as the commodity trading business shifts away from simple arbitrage toward deeper investment in assets and infrastructure.

"What we find now is that by not only providing a logistics function but also by bringing in capital, we're able to give our customers a more comprehensive solution," he said.

"That has really developed faster than I would have thought... when I started Freepoint."

Messer said the company had completed a half dozen structured finance deals this year, and said with a pipeline of new deals the pace should "continue if not grow".

He is following a similar strategy with the metals concentrates trading arm that Freeport acquired from JPMorgan - another former Sempra Commodities business - last year.

The firm has a "number of potential transactions in the pipeline", Messer said, referring to structured debt financing deals that fund early-stage projects in return for offtake. Freepoint signed its first mine financing deal in January.

"We are going to be particularly focused where there's a significant logistics component," he said. "Also the size of the transactions are probably going to be - from a bank's point of view - on the smaller size."

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(For other news from the Reuters Global Commodities Summit, click here)

(Reporting by Jonathan Leff; editing by Andrew Hay)

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