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CME Loses Out on LME Takeover - Analyst Blog

By: Zacks.com
Posted: 5/24/2012 5:45:00 PM
Referenced Stocks: BCS;C;CME;GS;ICE

After NYSE Euronext Inc. ( NYX ), CME Group Inc. ( CME ) has also been eliminated from the race to acquire the London Metal Exchange ("LME"), as per Bloomberg. Following the exit of CME Group, only IntercontinentalExchange Inc . ( ICE ) and Hong Kong Exchanges & Clearing Ltd. ("HKEC") remain in contingent to take over the 135-year old metal exchange.

LME is considering the offers of the two bidders and will take its final call after taking into account the companies' ability to develop LME's business, the viability of their plans as well as the bid price. Both ICE and HKEC are said to have placed bids of over £1.0 billion for the deal, although the prices are open to adjustments.

However, it is expected that the two competing exchanges will meet the shareholders of LME before the final decision is taken. The bidders require the support of shareholders owning at least 75% of LME's shares. The final decision is expected to take a few more weeks.

CME's successful takeover of LME would have mellowed the competition in the metal exchange market as the exchange directly competes with LME for US copper contracts and also has an expanding steel trading business, while neither ICE nor HKEC offer metal contracts at present. The purchase would have significantly boosted the competitive strength of CME's metal exchange, Comex.

Nevertheless, HKEC provides LME with opportunities to expand in China, which is the largest consumer of metal, as well as the chance to offer clearing services in Chinese Renminbi. On the other hand, ICE boasts a large clientele in Asia, who hold the potential to be prospective customers for LME's metal contracts.

LME is highly sought after as it is the largest metal futures exchange in the world. It offers global benchmark futures and options contracts on base and other metals, including aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, molybdenum, nickel, steel billet, tin and zinc. The exchange traded metal contracts worth $15.4 trillion last year.

Shareholders of LME include a large number of renowned investment banks, such as JPMorgan Chase & Co. ( JPM ), Goldman Sachs Group Inc. ( GS ), Barclays Plc ( BCS ) and Citigroup Inc. ( C ).

CME currently carries a Zacks #5 Rank, which implies a Strong Sell rating for the short term. We maintain a long-term Neutral recommendation on the shares.


 
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