JPMorgan Chase & Co. agreed to sell its physical commodities unit to Mercuria Energy Group Ltd., ending the bank’s five-year foray into owning and storing raw materials and vaulting the Swiss firm closer to the world’s biggest commodity traders.
Mercuria will pay $3.5 billion in cash for the unit, according to a statement from the New York-based bank today.
“Our goal from the outset was to find a buyer that was interested in preserving the value of JPMorgan’s physical business,” Blythe Masters, head of the company’s global commodities business, said in the statement. “Mercuria is a global leader in the commodities markets and an excellent long- term home for these businesses.”
JPMorgan is selling amid concern that banks could control prices if they own commodities as well as trade them, or suffer catastrophic losses that would endanger the financial system. The Federal Reserve said in July it might force insured lenders to get out, and JPMorgan agreed later that month to pay $410 million to settle claims that it manipulated power markets, without admitting wrongdoing.
Mercuria was started in 2004 by former Goldman Sachs Group Inc. traders Marco Dunand and Daniel Jaeggi and is now the world’s fourth-largest independent commodity trader. Dunand and Jaeggi each own 15 percent of the Geneva-based company, which has grown rapidly in the past three years.
From 2011 to 2013, Mercuria hired 570 people, including executives from investment banks such as Goldman Sachs and Barclays Plc. That boosted the staff to 1,200 from about 10 in 2004.
Mercuria posted a $343 million profit in 2012 on revenue of $98 billion. The firm expanded its non-oil business in the past 18 months to include metals, gas, power and agricultural products. Trading from non-oil commodities now accounts for more than half of revenue, which topped $100 billion in 2013.
The JPMorgan unit had $3.3 billion in assets and generated $750 million in annual operating profit before compensation costs, according to people who have seen documents related to the sale. Those numbers would bring Mercuria closer to earnings achieved by competitors Vitol Group and Trafigura Beheer BV.
The unit would give Mercuria 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.
Mercuria also gets Henry Bath & Sons Ltd., a 220-year-old metal-warehouse operator based in Liverpool, England. The firm was a founding member of the London Metal Exchange, with products today that include aluminum, steel and copper as well as cocoa and coffee, according to its website.
Mercuria beat offers from Macquarie Group Ltd. and Blackstone Group LP to enter exclusive negotiations for the JPMorgan unit in February, according to two people with direct knowledge of the bidding.
JPMorgan’s commodities trading surged with the 2008 acquisition of Bear Stearns Cos., which included an energy- trading platform. To compete with Goldman Sachs and Morgan Stanley, JPMorgan bought UBS AG’s global agriculture and Canadian commodities units in 2009, and part of commodities trader RBS Sempra in 2010. That deal brought JPMorgan the Henry Bath unit.
Spurred by complaints from industrial customers, lawmakers held hearings in July on whether banks abused their ownership of raw materials to inflate prices. U.S. lawmakers also warned that a catastrophe involving a bank-owned supertanker or power plant could jeopardize a lender’s health and leave taxpayers on the hook for a bailout.
A day earlier, the Fed said it was reviewing a decade-old decision that allowed lenders includingJPMorgan and Citigroup Inc. into the business because physical commodities were “complementary” to banking.
JPMorgan announced in July that it was exploring a sale of its physical commodities business, including energy trading.