A costly acquisition may still show its mettle

Marc Sidwell
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AS THEIR shares fell 4.5 per cent yesterday, owners of stock in Hong Kong Exchanges and Clearing (HKEx) may have been wondering why it had fought so hard to acquire the London Metal Exchange (LME). At £1.4bn, the Hong Kong bourse had to pay a premium to wrest Europe’s last open outcry exchange from the rival attentions of Intercontinental Exchange, yet the market seemed to be giving the deal an immediate thumbs down.

But while the price was high, putting the commodity boom in emerging markets together with the exchange handling 80 per cent of the world’s metal futures trading could still make sense.

It’s true that the LME hasn’t been making huge sums, thanks to a constrained-profit model: just £11.4m in pre-tax profit in 2011 and £12.5m in 2010. However, the LME’s new user fee of $0.79 per lot comes in from next month, showing a fresh commitment to increasing revenues. HKEx has committed not to raise fees further, but only until 2015, when it could choose to reinvent the LME as a far more profit-driven enterprise. Also, the acquisition of LCH.Clearnet by the London Stock Exchange later this year will bring a windfall estimated at more than £31m, thanks to the LME’s eight per cent stake in LCH.

While both those effects will improve the numbers in the near term, the real question is whether HKEx has the power to open doors in China, which consumes over 40 per cent of the world’s metals. The revelation yesterday that the China Development Bank is backing HKEx’s purchase with a $1.8bn loan, seemed to suggest the mainland’s blessing. HKEx has stated that its rationale for buying the LME is “based on growth” in Asia and China. If it can deliver on this expansion plan, the economic energy of the East can still help this City institution earn its price.