By Jonathan Saul
LONDON, March 16 (Reuters) – State-run conglomerate China Merchants Group has made an informal bid to buy London’s Baltic Exchange, becoming the latest contender for the business that has been the hub of the global shipping market for centuries, two sources told Reuters.
The approach was made by the group’s subsidiary China Merchants Securities, according to the sources, who declined to be identified as the matter is not public. “They are the latest (suitor) and certainly, with such a massive group, it shows how this is heating up,” one source said.
An acquisition of the Baltic, which was founded in 1744, would give the Chinese conglomerate ownership of the industry’s benchmark indices – which could be further commercialized – and greater access to the multi-billion dollar freight derivatives market.
It is the latest Chinese company to look at shipping and commodities targets in Europe, aiming to take advantage of a market downturn that has pushed down valuations of some firms.
China Merchants Securities, which is listed in Shanghai , did not respond to repeated requests for comment.
A spokesman for China Merchants Group in the Chinese city of Shenzhen said on Wednesday he was not aware of any bid for the Baltic Exchange, adding if there was a bid it would be processed by one of the group’s units, which are listed in various locations such as Shanghai, Hong Kong and Singapore.
A Baltic spokesman said the exchange “to date hasn’t commented on the identity of anyone involved in the process and declines to comment on whether or not the Baltic is in discussion with CMG (China Merchants Group).”
On Feb. 26 the privately held Baltic Exchange confirmed it had received a number of “exploratory approaches” after the Singapore Exchange Ltd (SGX) revealed it was seeking to buy the business.
Both statements came a day after Reuters exclusively reported the Baltic had held talks with SGX and other potential buyers including CME Group, ICE and Platts. Last October, sources said the London Metal Exchange (LME) had made an approach to buy the Baltic.
Clearing houses and exchanges are all looking for a way to distinguish themselves at a time of growing regulatory scrutiny and weak commodities markets. Buying the Baltic would allow any of those entities to diversify their activities into freight.
China Merchants Group is among the country’s biggest conglomerates, with interests spanning ports, shipping and financial services.
In December, Chinese authorities approved its acquisition of state-run logistics group Sinotrans & CSC Holdings Co, part of efforts by Beijing to make sprawling government-controlled firms more efficient as economic growth slows.
That deal placed China Merchants’ estimated assets worth 624 billion yuan ($96 billion) and Sinotrans & CSC assets of about 109 billion yuan under one roof.
The two sources said China Merchants Securities was willing to pay a premium above other bidders to acquire the Baltic.
Separate sources had previously estimated the deal could be worth about 84 million pounds ($118 million).
Other Chinese firms looking at targets in Europe include COSCO, last month named by Greece as the preferred bidder for its biggest port, Piraeus. Since then, COSCO has merged with fellow state firm China Shipping Group to create one of the world’s biggest commercial shipping companies, China Cosco Shipping Corporation.
China Merchants still faces competition from SGX and others such as the LME, which was bought by Hong Kong Exchanges and Clearing in 2012 for $2.2 billion.
The Baltic is owned by around 380 shareholders, many from the shipping industry. It produces daily benchmark rates and indices that are used across the world to trade and settle freight contracts.
Last month Baltic Exchange chairman Guy Campbell wrote to the company’s wider members, comprising around 650 companies that include the shareholders, and said no formal offer had been received, adding that discussions “may very well lead nowhere.”
In 2011, the Baltic – via a wholly owned subsidiary -launched the first central freight derivatives platform, called Baltex. Freight derivatives, which allow investors to take positions on freight rates in the future, are a multi-billion dollar niche market which is seen as another attraction.
Any acquisition of the Baltic could face opposition from freight brokers who would fear some loss of their business.
John Banaszkiewicz, who runs freight derivatives broker FIS, wrote to fellow brokers after the Baltic announcement to highlight his worries over a sale.
“My concern is that a sale to an overseas exchange, which seems the most likely outcome, is followed by a more restrictive and probably more expensive agreement on the use of the indices for trading and settlement,” Banaszkiewicz wrote in a letter seen by Reuters.
“It seems to me that to sell the Baltic in a private bidding contest, while in some shareholders’ interest, fails to recognize the effect on wider stakeholders such as physical and FFA (freight derivatives) brokers whose shareholdings do not put them in line for a windfall but whose business could be affected dramatically.”
In the Baltic’s last annual report in the year to end-March 2015 it recorded an after-tax profit of 1.3 million pounds versus 901,809 pounds in 2014. Shipping industry sources say it could increase profitability, partly by charging more to data users.
($1 = 6.5189 Chinese yuan renminbi; $1 = 0.7095 pounds) (Additional reporting by Polly Yam in Hong Kong; Editing by Veronica Brown and Pravin Char)