The London Metal Exchange (LME) board examined non-binding bids for the world's biggest marketplace for industrial metals on Thursday, but a partial climbdown on plans to charge a controversial new trading fee could threaten the sale.
Some potential buyers have been watching how the LME deals with the dispute over the fee, as revisions are expected to dent projected extra revenue included in the valuation given to bidders.
The 135-year-old institution, where metals including copper, aluminium, nickel and zinc are traded by open outcry as well as electronically, said it would delay introduction of the new fee from the previously announced March 1 until July 2. It will also scrap it for certain heavily traded spreads.
Analysts and industry sources had valued the exchange at 500 million to 1.5 billion pounds ($783 million-2.4 billion) based on expectations of higher earnings boosted by the fee, new products and its plans to build its own clearing business.
A rare public spat between users of the exchange and the LME over the fee it announced in December forced it to go back to the board and review objections, while the board was also looking at bids from around half of the roughly 15 companies that had expressed interest.
Bidders include CME Group
Successful introduction of the fee had been expected to increase revenue and make the exchange a more attractive buy.
UBS analyst Alex Kramm said the LME's concessions over introduction of the fee highlighted the difficulties of selling the exchange.
It reiterates the hurdle to get a deal done because the members or current owners might have different motivation, and they might not all be aligned in terms of wanting to sell or not, Kramm said.
Lower fee rates or lower revenue potentially makes the deal not as attractive, but they could implement fee changes after a deal anyway, he added.
A major concession by the exchange was to drop plans to apply the fee to certain spread trades.
A key feature of these trades, which allows customers to roll their position forward by up to 14 days, is that brokers normally absorb the client component fee, which can be as low as one penny. Big clients had threatened not to pay the new fee.
I'm still disappointed. I had hoped they would delay it further for more consultation, a trader said. It's still going to have a massive effect.
Well-placed sources told Reuters that the LME's new trading fee could account for up to two thirds of its total valuation.
A source at a category II member of the exchange, said he expected the value of the exchange to be significantly more than the mooted one billion pounds.
The LME reported revenue of around 50 million pounds for 2010, so any price around 1 billion pounds values the exchanges at some 20 times revenue, Peter Lenardos, an analyst at RBC Capital Markets, said.
Even if the management doubled revenue in the medium term, they (any bidders) are still paying 10 times revenue, so the current valuations look very full, Lenardos said.
Personally I'd not want to be a shareholder in any company paying that for the LME.
QUESTIONING THE SUMS
The LME operates on a constrained-profit model and has so far kept fees low for the trading houses and banks that own the exchange and use the market.
LME Chief Executive Martin Abbott said last month the new fee was aimed at boosting revenues needed to update technology, raise capital to meet expected regulatory requirements and to take on increasing competition.
The business just isn't that profitable. Even if you treble fees, volumes will go down, I can't see why anyone would pay these sums for the exchange, said a trader for a ring-dealing member of the exchange.
I don't think it will get sold. There's too many members opposed, and you only need 25 percent to vote against.
(Additional reporting by Luke Jeffs in London and Josephine Mason in New York; Writing by Susan Thomas; Editing by Veronica Brown and Anthony Barker)