LONDON JP Morgan (JPM.N) has dramatically boosted its influence in the battle to acquire the London Metal Exchange by increasing its stake this week to become the biggest shareholder.
JP Morgan Chase now has stronger input into any changes proposed by suitors while making a tidy profit from any sale, but retains the option to team up with others to block a takeover, analysts and industry sources said.
The U.S. investment bank won a bidding process to buy a 4.7 percent stake in the LME, the world's dominant market for industrial metals trading, held by defunct broker MF Global Holdings MFGLQ.PK.
J.P. Morgan was not immediately available to comment on the reasons for its purchase.
The sale gives JP Morgan a stake of 1.4 million shares or 10.9 percent, jumping ahead of the former dominant shareholder, Goldman Sachs (GS.N), which owns 9.5 percent.
The No. 3 shareholder Metdist has 9.4 percent, followed by UBS AG UBSN.VX with 4.3 percent.
The LME, one of the last bastions of open outcry trading, has said at least 10 parties have expressed interest in buying the exchange and it is due to open its data room next month.
Any change in ownership needs approval from members holding 75 percent of ordinary shares.
"It's a win-win situation...I think in a way, it is a hedge against all those uncertain events," said analyst Robin Bhar at Credit Agricole in London. "They may also be taking a view that it could be a quick and profitable investment."
HEADING OFF GOLDMAN?
KPMG, the administrators of MF Global, said there was a great deal of interest in the shares and some industry sources said one motivation for JP Morgan to put in a strong bid was to keep rival Goldman Sachs from increasing its stake even further.
"I'm sure Goldman Sachs would have been interested in building their stake further, others like that who would have been trying to gain a bigger seat at the table for when it comes to make decision," said a high-level source at another LME member with a shareholding.
A takeover by another exchange -- such as the CME Group (CME.O) or IntercontinentalExchange (ICE.N) -- could mean big changes for the LME, which has kept fees low for its members who also own the business.
Members like JP Morgan, one of 11 LME members allowed to trade in the ring, could be hit by an increase in running costs if a new owner decides to boost profits at the exchange by hiking fees.
In that case, members would have to weigh if a one-off profit from selling their stakes at a sharp premium compensates for higher costs in the longer term.
Another issue is whether floor trading would continue at the LME under a new owner.
"If one of the other exchanges, which are all electronic succeed with a bid, then the days of the floor could be numbered. JP being a floor member might try and say "No, we want to keep it open'," Bhar said.
Goldman Sachs is not a ring-dealing member.
Both JP Morgan and Goldman Sachs have acquired warehousing companies in recent years, sparking controversy from critics who have said there is a conflict of interest.
They could have an interest in heading off stricter rules that may be imposed by a new owner regarding LME trading members that also own warehouses, industry sources said.
"The fact that JP Morgan and Goldman Sachs are involved in all the aspects of the LME, brokerage, warehousing and now as shareholders, clearly that throws up some challenges with regards to how the exchange wants to manage that in terms of its conflicts," said the source at another LME member.
KMPG did not say how much JP Morgan paid for the LME stake, but sources familiar with the situation pegged the price at 25 million pounds, which would imply a total value for the exchange at around 530 million pounds.
The price works out at 41.67 pounds per share, a premium of nearly ninefold from the last traded price of LME ordinary shares, 4.925 pounds, in July.
"In terms of value, personally it is where I would have thought value would be. Puts total value around say $750 million, sounds like enough money. So to me they don't sound cheap," said an executive at another ring-dealing member.
Some industry players have forecast that a bidding battle could further boost the price of the LME to 1 billion pounds.
(Additional reporting by Melanie Burton)