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,
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
It instantly drew criticism for
paying way more than the average price-to-earnings ratio for
the exchange, with the LMEwhich has never operated on a
fully commercial model, keeping its fees low relative to other
exchangesgenerating a 2011 net profit of just £7.7
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 buyersthe other two were the
worlds 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
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 didnt think about it
that way," Lamba said. "Its 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
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, were not expecting miracles;
hopefully we can get there," he added.
One of HKExs 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,"
This has been tricky in the past
couple of years.
"Last year and this year
probably weve 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 isnt a lot, and our
capex this year is over HK$1 billion."
The exchanges 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 exchanges ongoing capex is right around HK$400
million to HK$600 million ($51.6 million to $77.4 million),
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
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 doesnt go through,
well 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
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 exchanges dividend policy.
"If we have to (change the
policy), we have to; its not a written policy, but right
now we see no reason to change it," he added.