SINGAPORE/DUBAI (Reuters) - A shake-up of the world’s top commodity traders intensified on Thursday, with merchant Louis Dreyfus selling its jointly owned energy trading unit amid an upheaval spurred in part by tough new banking regulations.
A day after private equity company Carlyle Group LP (CG.O) bought a leading commodity-trading hedge fund, Louis Dreyfus Group and a hedge fund owned by JPMorgan Chase & Co (JPM.N) have agreed to sell Louis Dreyfus Highbridge Energy (LDH Energy) to two investor groups, including renowned hedge fund manager Paul Tudor Jones. The company will be renamed Castleton Commodities International.
Dreyfus - famed alongside Archer Daniels Midland Co (ADM.N), Bunge Ltd (BG.N) and Cargill as the “ABCD” traders that dominate global agricultural commodity flows - said the move to sell would allow it to focus on its “core business.” It comes just after the secretive, family-owned firm entered the bond market in order to fund an expansion plan focused on agriculture.
But experts also said the deal was likely partly fuelled by tougher regulations that ban proprietary trading by banks and could limit their ability to invest in physical assets. Earlier this year, JP Morgan sold its small metal concentrates division because of U.S. Federal Reserve restrictions on certain commodity trades.
“The fact that investment banks are meant to be reducing prop trade is creating a vacuum that has to be filled by somebody,” said one executive at a rival merchant.
One lawyer who works on deals in the industry said much of the recent activity was driven by a desire to avoid placing a heavier regulatory burden on largely unregulated parts of the business, such as physical commodity trading.
LDH Energy will be sold for an undisclosed amount to a private investment vehicle owned by Glenn Dubin, the chairman and co-founder of Highbridge Capital Management, as well as an independent investor group that includes Paul Fribourg, part of the family that once owned Dreyfus rival Continental Grain Company.
While industry giants such recently listed Glencore International Plc (GLEN.L) and rival Vitol SAVITOLV.UL have maintained their preeminence, a dozen or so mid-tier firms have been shaken up by acquisitions, start-ups and ownership changes that are dramatically altering the competitive landscape.
It began in 2011 with the rebirth of Sempra’s merchant shop in the form of Freepoint Commodities, backed by private equity. This year, Japanese trading firm Marubeni Corp (8002.T) made a deal to buy U.S. grains trader Gavilon.
And this week, Carlyle Group moved to recreate a merchant trader in miniature by combining its physical assets with the trading acumen of Vermillion Asset Management LLC, a $2.2 billion commodity hedge fund with a history of taking trades into the physical market.
The regulatory pressures are most apparent in the case of Morgan Stanley (MS.N), which has been looking to sell all or part of its commodity trading division for the past year. The deal would not only raise much-needed funds, it would allow Morgan to continue proprietary trading and hold onto the array of storage tanks, tankers and terminals that help its traders.
But sale negotiations with Qatar’s sovereign wealth fund appeared to hit a snag recently, banking sources said.
The hitch was not about price, but about the structure of the deal, which would see the divested unit run by the existing commodities team at Morgan, according to one source. He spoke after the Financial Times reported that the deal talks had moved toward Qatar taking a majority stake.
Along with arch-rival Goldman Sachs (GS.N), Morgan Stanley was one of the original “Wall Street refiners” that blazed a trail in the energy derivatives markets in the 1980s by combining physical assets with trading expertise and access to capital.
Morgan Stanley, Goldman and JP Morgan are awaiting a verdict from the Federal Reserve on whether they can keep those physical assets. The status of assets, including Morgan Stanley’s Denver-based TransMontaigne refined products supplier, has been in question since investment banks became regulated by the Fed as bank holding companies during the 2008 financial crisis.
While its rivals have shifted their commodities focus to client hedging and index business, Morgan has maintained a strong presence in storing and transporting fuels, making it more vulnerable to the Fed ruling.
LDH had also built up a sizeable array of physical energy assets, including a major natural gas liquids and oil storage facility at Mont Belvieue, Texas, but sold all its midstream assets to Energy Transfer Partners L.P. and Regency Energy Partners LP for $2 billion last year.
But it still owns two coal blending terminals in West Virginia and Kentucky, as well as two small power plants that it purchased earlier this year, according to its website.
Established in December 2006, Stamford, Connecticut-based LDH Energy markets physical commodities, including coal, natural gas, crude oil and refined products. It employs over 300 people, including five fuel oil traders hired just four months ago.
LDH Energy made $200 million to $300 million in net profit last year, according to the Financial Times, which cited people familiar with the deal as saying the valuation of the business is in “the hundreds of millions of dollars.”
Louis Dreyfus, a 160-year-old company with French roots that has its head office in the Netherlands and its main trading operations in Switzerland, has been expanding its core agricultural trading business and ditching other operations such as telecommunications and real estate.
Louis Dreyfus said earlier this year it planned to increase investments by 40 percent over the next five years compared with the 2006-2011 period and has since participated in the multi-billion-dollar listing of Malaysian palm oil group Felda Global Ventures Holding Bhd’s (FGVH.KL) and bought Dutch dairy trader Ecoval.
Owner Margarita Louis-Dreyfus has dismissed the idea of listing the firm on a stock market, but market rumors persist at a time of unprecedented change in the ways the titans of commodity trading are funding their operations.
After unsuccessful merger talks with Asian commodities group Olam International Ltd (OLAM.SI) in 2010, last year’s LDH asset sales helped ease pressure on Dreyfus, sources say, but the group is still seeking new capital.
Its successful bond issue in September was worth $350 million. However, an attempt to list Brazilian unit Biosev failed to take off amid weak market conditions.
Additional reporting by Gus Trompiz in Paris, Richard Mably in London, Jonathan Leff and Mike Erman; Editing by Will Waterman and Andre Grenon