The Singapore Exchange Ltd. is tying up with London's main bourse to make a joint bid for the London Metal Exchange, a source told Reuters on Friday, as the world's largest metal market seeks a suitor in a deal that could be worth £1-billion.
The consortium has appointed a bank to advise it on the bid, said the source, who had direct knowledge of the deal, with the auction expected to attract rival offers.
The joint bid underscores the ambitions of both exchanges to diversify into the fast-growing space of metals trading, as traditional businesses of equity and derivatives trading faces increasing competition.
Both SGX and LSE are coming off failed merger attempts amid a flurry of exchange auctions that were prompted by loss of market share across the industry to alternative trading venues.
"This is a joint bid, so I guess SGX would have learned some lessons from the ASX bid," said Roger Tan, managing director at SIAS Research in Singapore.
SGX, led by experienced dealmaker Magnus Bocker, has been trying to raise the profile of Asia's second-largest listed bourse and compete against its larger rival in Hong Kong.
Mr. Bocker was the man who stitched together seven Nordic bourses to create OMX, later sold to NASDAQ.
But his attempts to buy ASX Ltd. were rejected by the Australian government five months ago.
"To a certain extent, there is some necessity for SGX to try to grow both organically and by M&A. LME has proven over the years to be a credible exchange. If anyone is able to acquire the platform, then it will be able to use the platform to expand its own business," Mr. Tan added.
SGX shares fell 1.3 per cent to $6.63 (Singapore), giving it a market value of about $5.6-billion U.S. (£3.5-billion). LSE shares were down 1.4 per cent, valuing the company at about $3.5-billion (U.S.).
LME's pre-tax profit in 2010 fell 28 per cent to £12.5-million. Still the exchange's pre-eminent position in the world of metals trading will make it a much sought after asset.
"But since LME is already an established arena, it won't come cheap," Mr. Tan added.
SGX has been expanding its suite of commodity products, particularly industrial metals. In February, SGX launched small-size, cash-settled metal futures in partnership with LME, hoping to carve out a niche in a market already crowded with competing and sometimes underused equivalents.
But the copper, aluminum and zinc mini-contracts, one-fifth the size of the standard LME product, have been struggling to find an audience, with trading volumes thin since the launch.
LME, the world's biggest market for industrial metals, said last week that it was considering a sale, with an expected price tag of around £1-billion. Chief executive Martin Abbott told Reuters on Thursday more than nine potential suitors have shown an interest in acquiring LME.
SGX and LSE declined to comment. The source declined to be named as the discussions were confidential.
LSE, too, had to face defeat in its pursuit of the Toronto Stock Exchange after a consortium of Canadian banks launched a counter offer.
But that has not deterred LSE from attempting more deals. Just this week, LSE CEO Xavier Rolet won the backing of LCH.Clearnet's board for his planned €1-billion purchase of Europe's largest independent clearing house.
A reason LSE may be interested in acquiring LME is to protect the revenues it is buying through its purchase of LCH.Clearnet. LME, a big user of LCH.Clearnet, has recently eyed setting up its own clearing system and if that happens LCH.Clearnet stands to lose a large chunk of the margins it holds, about 50 per cent according to one source.
The SGX-LSE combination is expected to face competition from other LME suitors, including CME Group Inc., the largest futures exchange in the United States, IntercontinentalExchange and U.K.-based broker ICAP, according to sources.
"Joining hands with LSE gives them a good starting point in this process," the source added, referring to SGX.
LME, established in 1877 above a London hat shop, accounts for 80 per cent of traded volume in global metal futures transactions. It saw record trading volumes last year of 120 million lots, equivalent to $11.6-trillion (U.S.) and 2.8 billion tonnes of metal.
Any deal would have to be accepted by 75 per cent of shareholders, which include Goldman Sachs, J.P Morgan and trading firms including Amalgamated Metal Trading and Metdist.