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CME Eyes European Expansion - Analyst Blog
4/10/2012 10:00:00 AM
CME Group Inc. ( CME ) looks to be on an acquisition spree, as just a week after acquiring US-based GreenX Holdings, the company is now eyeing its own futures exchange in the UK, according to Financial Times' report yesterday.
Ever since CME Group started its trade contract clearing services in the UK last year, alongside the company has also been looking to expand its spread as a futures exchange operator. On these lines, the company is bidding hard to bag the London Metal Exchange (LME), which is also being hawked by other derivative giants such as NYSE Euronext Inc. ( NYX ) and IntercontinentalExchange Inc. ( ICE ).
Reportedly, these derivative giants placed bids estimated to be worth £1.0 billion ($1.57 billion) that closed in February this year. This signified more than 15 times the last traded price before the sale process began in September last year. Meanwhile, LME has four chosen prospective bidders comprising CME Group, NYSE, IntercontinentalExchange, Hong Kong Exchange and Clearing Ltd.
Founded in 1877, LME is the world's largest futures exchange, which offers futures and options contracts on base and other metals, which include aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, molybdenum, nickel, steel billet, tin and zinc.
LME is owned by 93 members, the top most shareholders being JP Morgan Chase & Co. ( JPM ) and Goldman Sachs Group Inc. ( GS ) with 10.9% and 9.5% stakes, respectively, along with Barclays Plc ( BCS ) and Citigroup Inc. ( C ). LME is also one of the last member-owned exchanges in the world wherein trading is conducted through the open-outcry system in the ring by the ring dealing members. In addition to the 12 companies who have exclusive rights to trade in the ring, around 100 companies are involved in the LME in total.
As the LME offers contracts with daily expiry dates of up to three months from the trade date, along with longer-dated contracts up to 123 months, it also allows for cash trading. Furthermore, it offers hedging, worldwide reference pricing and the option of physical delivery to settle contracts.
Meanwhile, addition of LME to CME Group's basket could enhance its metals exchange, Comex. Hence, nailing this deal should significantly boost the company's competitive and operating leverage in the region. Nevertheless, CME Group is also mulling a plan B, which could be to start-up its own futures exchange in London so as to tap European opportunities from the financial hub of the continent.
However, we believe that the company can shelve this plan and concentrate on LME acquisition that is slated to announce its bid results by May 7, 2012
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