HONG KONG Hong Kong Exchanges and Clearing Ltd (0388.HK) is in talks with banks for a loan to help it finance an offer for the London Metal Exchange, sources told Reuters, a sign that the world's most valuable bourse is aggressively pushing ahead with its bid.
According to a source with direct knowledge of the matter, the holding company for the Hong Kong stock exchange, known as HKEx, is seeking to raise up to $3 billion in its first-ever acquisition loan to back its bid for the 135-year old commodities exchange.
A second source confirmed the loan discussions, but could not verify the amount. Both declined to be identified because the talks are not public.
HKEx sat on the sidelines when the exchange consolidation wave hit major financial capitals more than a year ago. Its place on the LME auction's short list, together with its loan pursuit, shows that this time the HKEx is ready to pounce.
HKEx declined to comment.
In addition to HKEx, LME has short-listed three other suitors - CME Group Inc (CME.O), NYSE Euronext NYX.N and InterContinental Exchange Inc (ICE) (ICE.N), and has set a May 7 deadline for second-round bids.
Analysts and industry sources have valued LME at between 500 million and 1.5 billion pounds ($783 million-$2.4 billion). A $3 billion acquisition financing package suggests HKEx's willingness to pay top dollar for control of the world's biggest market for industrial metals. The company could use leftover cash from the loan for other corporate purposes.
As in any auction, HKEx could decide not to proceed with a bid or a loan to back it.
HKEx, with a market value of about $18 billion, is the world's biggest bourse by market capitalization, sitting on cash and short-term investments of about HK$30.1 billion ($3.9 billion) as of the end of last year, according to Thomson Reuters data.
The exchange has limited ability to dip into cash reserves to fund purchases, however, as it is required to maintain a capital buffer to meet counter-party risks involved with running a clearing house.
HKEx stayed out of the exchange consolidation wave of more than a year ago that swept over bourses in London, New York, Singapore, Sydney, Toronto and elsewhere. The wave eventually subsided after most of the deal discussions fizzled out.
At the time, HKEx focused on forming joint ventures and other non-equity alliances with neighboring Shanghai and Shenzhen bourses.
However, HKEx has made clear its ambition to ramp up in the commodities space. Just this year, the company set aside $258 million to expand into commodities and fixed income on its own. The push is led by Chief Executive Charles Li and head of market development Romnesh Lamba, both former investment bankers.
Li and Lamba have said they want to move into fixed income, currency and commodities as a means of expanding the exchange outside of its traditional equities space.
Earlier this week, HKEx appointed Chow Chung-kong, former head of Hong Kong's subway system, to its board for a two-year term. Chow is widely expected to be made chairman at a board meeting later this month to replace Ronald Arculli.
($1 = 7.7649 Hong Kong dollars)
(Additional reporting by Kelvin Soh; Editing by Michael Flaherty and Chris Lewis)