Evan Vitale Consulting: Mercuria Buys JPMorgan's Commodities Business

Friday, October 3, 2014

Mercuria Buys JPMorgan's Commodities Business – New York Times

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Daniel Jaeggi, co-founder of Mercuria Energy Group.Credit Denis Balibouse/Reuters

Updated, 2:25 p.m. | LONDON — The Mercuria Energy Group, a rapidly growing Swiss trading firm, announced on Friday that it had bought JPMorgan Chase’s physical commodities business in an all-cash deal.

In March, JPMorgan announced that it had agreed to sell the business, including oil supply contracts, to Mercuria for $3.5 billion in cash.

Mercuria did not announce the terms of the agreement. But it was expected to pay about $800 million for the portion of the business that it was acquiring, according to people briefed on the matter who were not authorized to discuss the deal publicly.

In its announcement, JPMorgan said it had agreed to sell almost all of the remaining portion of the physical commodity assets to other buyers. JPMorgan is expected to receive about $3.5 billion for the business as a whole, people briefed on the matter said.

JPMorgan said it would continue to be an active participant in the commodities markets, providing traditional banking activities including financing, derivatives, the vaulting and trading of precious metals,and offering advice.

JPMorgan employees transferring to Mercuria will primarily be in Mercuria’s trading hubs of Calgary; Greenwich, Conn.; Houston; London; and Singapore.

As part of the deal, Mercuria said it was acquiring Henry Bath, the metals warehousing, storage, and handling business. Mercuria said it would operate the warehousing business as a stand-alone subsidiary independent from its trading operations.

The deal comes as big banks are selling or reducing their commodities operations as regulatory pressures grow and the Volcker Rule is adopted, which restricts the ability of banks to trade for their own accounts.

After the sale, JPMorgan is expected to continue to conduct traditional banking activities in the commodities markets, including trading precious metals and making markets in commodities.

JPMorgan first announced its intention to sell its physical commodities operations in 2013. Since then, several rivals have abandoned or reduced their commodities operations.

Morgan Stanley sold a physical oil business to Rosneft of Russia in December. Deutsche Bank has said that it plans to get out of most of its commodities businesses worldwide, while Goldman Sachs is exploring the sale of its metals warehousing unit.

The exits come as regulators have taken a harder look at whether banks should own warehouses for aluminum or pipelines for oil, while also trading those commodities.

Regulators have expressed concern that financial institutions might have too much control over, and potentially inflate, the prices of commodities by owning such assets.

The Federal Reserve, which enacted an exemption several years ago to allow investment banks to own pipelines and storage facilities for oil and other commodities, is considering restrictions on the activities of financial holding companies in the physical commodities markets.

The Commodity Futures Trading Commission has also subpoenaed Goldman Sachs and other owners of metals warehouses as part of an inquiry into potential irregularities in the aluminum market.

Despite being smaller than originally anticipated, the deal is expected to increase Mercuria’s clout.

The firm was founded in 2004 by two former Goldman Sachs traders, Marco Dunand and Daniel Jaeggi, and has become one of the world’s four biggest independent commodities trading businesses. It has offices in 28 countries and employs more than 1,000 people.

Mercuria began with a focus on oil trading but has since expanded to other products and assets. Oil remains a central focus of its business.

The company had $112 billion in turnover in 2013.

The Wall Street Journal reported the smaller acquisition by Mercuria late Thursday.

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