HONG KONG -- The Hong Kong stock exchange on Friday agreed to pay 1.4 billion pounds ($2.18 billion) to buy the London Metal Exchange (LME), in a deal that gives Asia's largest bourse a much needed entry into a commodity trading platform, and brings LME members closer to China, the world's biggest metals buyer.
Hong Kong Exchanges and Clearing Ltd (HKEx) will finance its acquisition of the 135-year old commodities exchange operator through its existing funds and with a 1.1 billion pound bank loan, it said in a statement.
HKEx competed with several exchanges to win the auction, including the InterContinental Exchange, a U.S. commodities exchange. HKEx CEO Charles Li had previously sat out a wave of consolidation among exchanges early last year.
"HKEx believes the combination will allow the LME and its members to significantly increase trading volumes through improved access to China and form the foundation for the growth of its commodities platform," it said.
Li, a former journalist and JPMorgan China banker, expressed confidence in the bid last month and was able to celebrate winning the LME at a party to mark the 12th anniversary of HKEx's listing.
The offer must now be approved by the LME board.
"The price is higher than some were expecting, but because the deal is not completely debt-financed there may be room for some accretion," said Sam Hilton, analyst at investment bank Keefe, Bruyette & Woods.
"Investors are more likely to be negative on this news, but that's partly because the bears have been very negative whereas the investors who are positive on this deal are at best lukewarm," he said.
The deal will help HKEx maximise commodity trading opportunities across Asia. The bourse has previously been more geared towards equity markets.
HKEx, the world's second-most valuable stock exchange, said the acquisition will add to its earnings from the third year after completion - expected in the fourth quarter of 2012.
HKEx sat on the sidelines through a wave of exchange consolidation in major financial centres more than a year ago. At the time, HKEx was focused on forming joint ventures and alliances with its neighbouring Shanghai and Shenzhen bourses.
It has since made clear its ambition to ramp up in commodities - a push led by Li and head of market development Romnesh Lamba, another ex-investment banker.
Some analysts have expressed concern the HKEx may be over-paying for the LME. Those concerns have partly weighed down on the company's shares, with the stock down 9.4 percent this year, compared to a 4.3 percent rise in the benchmark Hang Seng index.
(Additional reporting by Lawerence White and Alison Leung; Reporting by Denny Thomas; Editing by Michael Flaherty and Ian Geoghegan)