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‘We paid a fair market price’ for LME: Lamba

Keywords: Tags  Hong Kong Exchanges, LME, Romnesh Lamba, Andrea Hotter


NEW YORK — Hong Kong Exchanges & Clearing Ltd. (HKEx) paid the market rate for the London Metal Exchange and expects to more than recoup it in the next few years, Romnesh Lamba, head of market development, told AMM.

HKEx upped its bid for the U.K.-based metals trading exchange to £1.388 billion ($2.09 billion) and clinched the backing of the LME board before going on to secure overwhelming shareholder support in a July vote.

It instantly drew criticism for paying way more than the average price-to-earnings ratio for the exchange, with the LME—which has never operated on a fully commercial model, keeping its fees low relative to other exchanges—generating a 2011 net profit of just £7.7 million.

But Lamba said that criticism is unfair, adding that the sale process was a "full and fair auction" of the 135-year-old exchange.

"We paid a fair market price between a willing buyer and a willing seller. There were actually three willing buyers—the other two were the world’s biggest commodity exchanges and pretty much whatever we were willing to pay, they were willing to pay," he said, referring to Intercontinental Exchange Inc. and CME Group.

HKEx is optimistic the deal will generate substantial incremental revenue within a few years, Lamba said, whether via Chinese volume growth, its clearing business or new products.

"The LME will give us a decent financial return, maybe not a through-the-roof one, but it also gives us the ability of platform to do other things; commodities, being relevant to China, and so on. You could call that a strategic premium, but we didn’t think about it that way," Lamba said. "It’s not going to be a 12-month return, probably not two years either, but what we tell investors is that three to five years out we expect it to be generating a 10- to 15-percent annual return on investment."

HKEx is a highly valued stock and its investors are seemingly willing to take a longer-term view, according to Lamba. "So it gives us some breathing room in the next year or two to be able to show the returns. ... We went in with our eyes open, we’re not expecting miracles; hopefully we can get there," he added.

Dividend constraint

One of HKEx’s main financial constraints is its 90-percent dividend payment policy, which has been in place for the past several years and is very attractive to retail investors.

Depending on its share price, HKEx has a 2- to 4-percent dividend yield.

"Our constraint is that the cash flow we generate is very high, but we give 90 percent of it back to shareholders, so we have to live off the 10 percent," Lamba said.

This has been tricky in the past couple of years.

"Last year and this year probably we’ve been spending more than we keep," Lamba said. "Roughly speaking, we earn HK$4 billion to HK$5 billion ($516 million to $645 million), which means we only keep HK$400 million to HK$500 million, which isn’t a lot, and our capex this year is over HK$1 billion."

The exchange’s biggest expenditures have been mostly in infrastructure rather than technology, such as a new Hong Kong-based data center and an under-construction co-location and hosting services business, which together cost about HK$1.8 billion.

With that expenditure out of the way, the exchange’s ongoing capex is right around HK$400 million to HK$600 million ($51.6 million to $77.4 million), Lamba said.

HKEx maintains around HK$9 billion ($1.2 billion) in cash, primarily for risk-management liquidity for its clearing houses, and also to provide it with a "big cushion" if it overspends on capex one year.

"Before the LME deal we had no debt, and on a standalone basis financing is no issue," Lamba said.

The funding of the LME acquisition is structured so that HKEx has no meaningful principal repayment, including its convertible bond, in the first five years.

"With the LME, assuming the LCH.Clearnet deal goes through, the stake should be enough to fund LME Clear and then some; if it doesn’t go through, we’ll fund it," he added.

The LME is moving to bring clearing in house via a project known as LME Clear (amm.com, May 17).

It currently clears through LCH.Clearnet, which is being sold to the London Stock Exchange.

The exchange expects to earn around £50 million ($80.3 million) from its interest in the London-based clearing house.

On an ongoing basis, the LME should be able to fund its own capex, Lamba said, with no need to change the exchange’s dividend policy.

"If we have to (change the policy), we have to; it’s not a written policy, but right now we see no reason to change it," he added.


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