London Metal Exchange for 1.4 billion pounds ($2.2 billion) as it shifts into commodities to capitalize on Chinese demand.
Hong Kong Exchanges and Clearing Ltd. said it has signed an agreement with the LME, the world's largest metals market, to pay 107.60 pounds for each of its 12.9 million shares. The LME's board plans to recommend shareholders accept the offer at a meeting expected before the end of July.
The Hong Kong bourse's offer follows plans announced earlier this year to expand into commodities, marking a major move away from its slow-growing equities business.
Hong Kong Exchanges said the LME has yet to "realize fully the growth opportunity" in Asia, especially China, and the deal would provide a platform for "significant revenue growth" as LME expands its business and operations in the region.
Though the LME already accounts for 80 percent of global trading in nonferrous metals, "it really has a tremendous amount of room to grow in Asia," said Hong Kong Exchange CEO Charles Li.
China, the world's second biggest economy, has a near insatiable appetite for metals, fueled by its booming economy's demand for everything from cars to computers to skyscrapers. The country accounts for 42 percent of global consumption of nonferrous metals like aluminum, copper, nickel and zinc.
The deal would give China more power in influencing how metal prices are set in global trading. At the moment, capital controls and other issues mean that "even though China is such a big consumer they don't play as much a role as they should" in setting prices on the LME, Li said.
The deal would also give Chinese companies more access to futures contracts so they can hedge their risk, Li said.
Li said the Hong Kong exchange could use the LME to expand into dealing in other metals like iron ore and steelmaking coal, which are "very, very massively needed in China," as well as other commodity types.
The LME purchase would also allow the exchange to develop products denominated in yuan, China's currency, which China is trying to promote greater use of abroad. Li said yuan commodity contracts would "strongly accelerate" outflows of the currency to Hong Kong, a semiautonomous region of China with its own currency and legal system that is being positioned as a hub for offshore yuan trading.
The LME hosts trading of futures and options contracts worth, on average, $61 billion a day or $15.4 trillion annually. It's the last open-outcry exchange in Europe, where deals are made by traders huddling together on a trading floor and calling out prices, rather than electronically.
The LME also operates 732 warehouses in 14 countries to store the actual metal that backs the contracts traded on its market. A deal with the Hong Kong exchange would pave the way to bring storage sites in China into its network.
The Hong Kong exchange will use cash and new bank facilities of at least 1.1 billion pounds to finance the purchase.
The takeover also needs approval from Hong Kong Exchange's shareholders and British regulators. It's expected to close in the fourth quarter of 2012.