Hong Kong’s LME deal not profitable in the short term

Hong Kong Exchanges & Clearing Ltd.’s pursuit of the London Metal Exchange is transforming the Asian bourse into the industry’s worst performer.

Hong Kong Exchanges’ $2.2 billion bid for the LME this month valued the world’s largest trading venue for industrial metals at 181 times earnings, making it the most expensive bourse acquisition exceeding $1 billion on record, according to data compiled by Bloomberg.

While the merger will give Hong Kong Exchanges control of about 80 per cent of global trade in industrial-metal futures as it grapples with falling profits and a slump in initial public offerings, the New York Stock Exchange’s head said the price would have been too rich for the biggest US bourse operator. An increase in trading by Chinese companies on the LME is vital to justify the deal, making the takeover’s success dependent on China’s regulators, who have so far resisted granting the LME access to the mainland to protect its rival in Shanghai, according to Core Pacific-Yamaichi International (HK) Ltd.

“In the short-term, this acquisition will be a huge burden,” Michiya Tomita, a Hong Kong-based fund manager at Mitsubishi UFJ Asset Management Co, which oversees $65 billion, said. “The valuation they’re buying LME for is expensive. This investment could pay off eventually if they are able to boost China’s trading volumes on LME, but that’s not easy to achieve given current regulatory restrictions.”