JPMorgan Plans $3.5-billion Sale of Commodities Unit to Mercuria

After months of trying to sell its physical commodities business, JPMorgan Chase & Co. (NYSE:JPM) said today in a statement that it will be selling the unit to Mercuria Energy Group for $3.5 billion in cash. 

The deal, which is expected to close in the third quarter of this year, marks the end of the firm’s “five-year foray into owning and storing raw materials,” as per Bloomberg; it will, however, continue to provide services and products linked to commodities, including precious metals vaulting and trading.

Mecuria — what’s that?

At the same time, the sale pushes Mercuria to the level of top global commodities traders Glencore Xstrata (LSE:GLEN), Trafigura, Vitol and Gunvor Group. But what exactly is Mercuria? And who are the people behind it?

As the Financial Times explains, Mercuria was founded back in 2004 by Marco Dunand and Daniel Jaeggi, two former traders at Goldman Sachs (NYSE:GS). Since that time, it has undergone fairly significant growth, particularly in the last few years. For instance, its revenues doubled to $100 billion between 2010 and 2012, while its earnings reached a record of $580 million, the Financial Times states. Further, according to Bloomberg, Mercuria hired 570 people from 2011 to 2013, boosting its staff to 1,200. That’s a far cry from the 10 employees it had in 2004.

Currently, Mercuria is one of the world’s biggest oil traders, though it is also involved in the power, natural gas, coal and base metals sectors. It has offices in 28 countries.

Deal details

Specific details on what Mercuria will gain from the deal are somewhat scarce. Bloomberg notes that it will leave the firm with “gas and power trading operations on both sides of the Atlantic, physical assets spanning 40 locations in North America, an oil-trading book with a supply and offtake contract at the largest refinery on the U.S. East Coast and 6 million barrels of storage leases in the Canadian oil sands.”

It will also receive Henry Bath, a metals warehousing business located in Liverpool, England.

What’s more clear is that Mercuria had to work hard to beat out other potential buyers. The Wall Street Journal states that JPMorgan originally presented its commodities unit to “about 50 parties and received about 20 first-round bids for all or parts of the package.” Those bids came from major players like Macquarie Group (ASX:MQG) and the Blackstone Group (NYSE:BX).

Happily, JPMorgan seems confident that Mercuria is the correct choice. Blythe Masters, head of the firm’s global commodities operations, has been widely quoted as saying, “Mercuria is a global leader in the commodities markets and an excellent long-term home for these businesses.”

Whether Masters herself will also join Mercuria remains to be seen. The Wall Street Journal notes that “[h]er fate, and that of other senior executives, may not be resolved until the deal closes.”

Market impact

While the above details are important, it’s also useful to consider the background against which the JPMorgan-Mercuria deal is occurring.

A good explanation can be found in another article from The Wall Street Journal. It notes that Wall Street banks are in the midst of exiting the physical commodities trading business, largely due to the fact that regulators are imposing increasing restrictions on them. In particular, the Volcker rule, which “restricts the ability of banks to trade for their own accounts” and limits their ability to engage in commodities trading, is encouraging banks to take a step back.

Mercuria, however, is an independent trading house and as such “would not be subject to the same capital limits as a regulated bank,” according to the publication.

Whether such banks’ shift away from commodities trading will impact the market remains to be seen. As Silver Investing News reported in December 2013, when the Volcker rule received final approval, opinions vary, though overall the thought seems to be that there will be no significant impact. Any effects should become more clear as JPMorgan’s peers make their own exits from the business.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Will the Volcker Rule Impact Precious Metals Trading?