Abbott may collect millions as LME goes under the hammer

LONDON: From straitened origins in coal mining and the rag trade, Martin Abbott is in line for a major windfall as the 135-year-old London Metal Exchange goes under the hammer.
If the deal goes through, the LME's chief executive will collect his share of a shadow equity incentive scheme for a select group of managers which will possibly be worth as much as 21 million pounds ($33 million), depending on the selling price.
The LME, a last bastion of open outcry trading in a city dominated by computer dealing, opened its doors to a sale last year. The field has narrowed to three suitors and Abbott is helping to oversee the contest, although the shareholders — banks, traders and other firms which use the LME — must approve any deal.
With the winning bid expected to exceed an independent valuation of 1 billion pounds, 52-year-old Abbott and the other beneficiaries are likely to pocket the kind of payouts that have provoked outrage among ordinary Britons when awarded to bankers.
However, people inside the business seem unconcerned that he is one of a four-member team scrutinizing the bids. "Is it a conflict of interest? I don't think so. You can only wish the guy luck," said one head of a shareholding metals trading unit.
For Abbott, it will be a long way from the days when he labored at the coal face to support his studies for a law degree, or was so badly paid as a journalist on the fashion trade magazine Drapers Record that he had to walk to work because he could not afford the train fare.
Abbott, whose CV also includes a spell as a security guard, participates in a shadow equity incentive scheme along with a small group of colleagues, whose value will be boosted if there is a change of the LME's ownership.
The LME declined to comment on figures, but said details of how the scheme would work out if the exchange is sold would be disclosed in documentation sent to shareholders and would crystallize only if shareholders voted in favor of a deal.
However, two industry sources said he could get 7 million pounds if the deal succeeds.
The exchange, which accounts for 80 percent of traded volume in global metal futures transactions, achieved record trading volumes last year of 146.6 million lots, equivalent to $15.4 trillion annually and $61 billion on an average business day.
That's why CME Group, Hong Kong Exchanges and Clearing Limited and Intercontinental Exchange are vying for the LME, whose contracts serve as global benchmarks for metals such as copper, aluminum and zinc.
Its base is a modest building on Leadenhall Street in the City financial district where futures contracts in metals still change hands in ring trading, although deals are also struck electronically and on the telephone.
Abbott has sometimes been a controversial figure. A decision last year to raise fees still upsets some of the shareholder member firms who use the exchange and his appointment more than five years ago as chief executive raised some eyebrows.
Some people asked what a man with his career, which also included spells as an editor and publisher at top trade magazine Metal Bulletin, could know about the complexities of running the world's largest metals market.
But industry sources say he rapidly grasped the role and has impressed even his critics. He has led the LME to the brink of an historic sale, overseen the rise in trading volumes and opened the way to building a clearing service.
It is not unusual for chief executives to take part in a sale process and profit from incentive schemes when the deal is done. The LME said this week their scheme demanded "exacting performance criteria for increasing shareholder value".
Abbott seems to have done that. A 1.2 billion pound sale of the LME translates to around 93 pounds per A, or ordinary share, an almost 20-fold increase from the 4.95 they traded at last July — not bad for a company that reported net profit of 7.7 million pounds last year.
The exchange operates on a constrained profit model, keeping fees low for its shareholder members, although fees could rise sharply if the LME falls into other hands.
The trading head noted that a 1-billion-pound price tag no longer looked extravagant after NYSE Euronext, one of four original bidders, fell out of the race this week when its reported 800 million pound offer was deemed too low.
"Those are crazy numbers. And it gets to the stage where shareholders will say 'well, what's the point of holding on relative to my costs potentially increasing?" the metals industry source said.
"Of course there is the potential for us to be bled dry afterward. There's no such thing as a free lunch."
For Abbott, and the managers on the scheme, a sale could mean as much as 21.2 million pounds.
This is based on the 302,347 notional shares in the scheme, using 77 pounds per share and after subtracting the exercise price, according to Reuters calculations using figures in the LME's 2011 financial statement.
Currently the notional shares are valued on a formula that takes into account the company's profit and tax plus the price of its ordinary shares.
But the scheme allows that in the event of a change of control at the LME, the unit price value of the notional shares could take into account the ultimate transaction price.
In its 2011 annual report, the LME envisages a possible "material upward adjustment" to the option fair value if there is a sale. The LME said in an emailed response to Reuters queries that the company had seen a more than ten-fold increase in its share price since the scheme started in 2008.
Sources say HKEx, if it wins the auction, would keep the LME's open outcry pit open and other unique aspects unchanged. But it is not certain that Abbott would keep his job.
What if he is made redundant? "I'll add a line to the bottom of my CV saying I created shareholder value and toddle off down to the job center," he told Reuters late last year.
"I don't think it's a given that someone would clean out the management, but it's certainly a possibility. There are no CEOs for life."
FROM: REUTERS