LONDON Smaller shareholders in the London Metal Exchange (LME) have yet to be convinced that a sale would be in their interest, with some industrial users saying they will vote against a deal that might change a unique pricing system vital to their business.
Industrial users account for around 30 of a shareholder list numbering more than 60, and hold around 500,000 shares with voting rights. That compares with the top two, JP Morgan (JPM.N) and Goldman Sachs (GS.N), with more than a million shares each.
But due to the lopsided spread of shareholdings, a bid could fail if many small shareholders oppose it, even if it attracts more than 75 percent of total shares in the exchange, the world's largest marketplace for industrial metals like copper, aluminum, zinc and tin.
If large shareholders, such as JP Morgan and Goldman Sachs, vote for the bid but many small shareholders with as few as 12,000 shares each vote against, the bid could still fail.
"Industry would be very reluctant to vote in favor of a sale, because they feel any new owner would be more distant from the industry, more commercial," said one executive at a smaller shareholding company, who did not want to be named.
"It would probably not be as bad as they fear, but the parties are not doing enough to assuage those fears."
An LME spokesman said that "in considering any change of ownership of the exchange, the LME board fully understands that shareholders - small and large - will have careful regard to a broad range of factors, both financial and non-financial".
"The board fully expects members to give particular and detailed attention to matters regarding the continued operation of these globally important markets and to the exchange's unique nature," the spokesman said.
He added that the board encouraged shareholders and other interested parties to continue to share their views directly with the LME to enable the clearest possible view on the preferred outcome to be shaped.
"As we have made clear from the outset, any decision to change ownership rests firmly in shareholders' hands," he said.
Aurubis (NAFG.DE), Europe's largest copper producer and holder of 24,000 shares, told Reuters last month it would vote against a sale of the LME, no matter what the price, and that other industry shareholders would probably do the same.
The 146-year-old German company, a big voice in the copper industry in Europe, has written a letter to the LME saying the exchange's metal prices, as reference prices all along the value chain, "should remain an essential element of our industry".
"We also say that the LME, given its current ownership structure, with its financial, broker and industry members, is a good safeguard of necessary neutrality," Aurubis executive board member Stefan Boel told Reuters. This diversity could be lost through a takeover.
"If it's only one party, anything could happen in theory."
The LME said last month it had received a "good number" of non-binding bids for the exchange.
Industry sources have said suitors include CME Group (CME.O), NYSE Euronext NYX.N, Hong Kong Exchanges and Clearing Ltd (HKEx) (0388.HK) and InterContinental Exchange (ICE) (ICE.N).
Analysts and industry sources have valued the exchange at 500 million to 1.5 billion pounds ($783 million-2.4 billion) based on expectations of higher earnings boosted by fees, new products and its plans to build its own clearing business.
"There are many members who view making a notional profit on the sale, at the expense of an exchange that doesn't work as well for them, as being a very bad trade," said an industry source.
"To me it's not going to be about the number, it's going to be about how any potential bidder can convince the membership that the long-term interests of users of the market are going to be maintained."
The LME uses a unique prompt date structure, which sets it apart from other futures exchanges .
The member-owned LME provides a transparent forum for all trading activity and as a result helps to 'discover' what the price of material will be months and years ahead, the LME says on its website.
This helps the physical industry to plan forward in a market subject to often severe and rapid price movements. Such is the liquidity at the LME that the prices 'discovered' are recognized and relied upon by industry throughout the world.
LME contracts allow all those along the metal supply chain - from miners, smelters and fabricators, to merchants and consumers - to hedge against price risk. The exchange in London's Leadenhall Street retains open outcry on its circular floor, as well as electronic trading.
Unlike other commodity markets, which are usually based on monthly prompt dates, most LME futures contracts offer daily and weekly prompt dates, which are valued by industrial users.
"If it wasn't for the industrial users there would be no LME, it's reason for being would cease," another industry source said. "It would become like any other futures exchange."
Some of the LME's smaller shareholders contacted by Reuters, including Finnish stainless steel group Outokumpu (OUT1V.HE) and KME Germany, a major maker of semi-finished copper and copper alloy products, declined to comment.
A spokesman for Norwegian aluminum maker Norsk Hydro (NHY.OL) said the company was confident that the "LME is an efficient and competitive market-place for the global price-setting of aluminum".
"We expect that this will continue to be the case also if the ownership structure of the LME should change," the spokesman said. Hydro has 60,000 shares in the LME.
(Additional reporting by Harpreet Bhal; Editing by Veronica Brown and Anthony Barker)