JPM deal propels Mercuria to elite club of commodity titans

Reuters - UK Focus

By Dmitry Zhdannikov and David Sheppard

NEW YORK (Frankfurt: HX6.F - news) /LONDON, March 19 (Reuters) - The big three justbecame the big four.

Mercuria's purchase of JPMorgan's physicalcommodities business marks the culmination of a 10-year journeyfor Swiss traders Marco Dunand and Daniel Jaeggi, two men whotransformed a small trading house into an operation to rival thebiggest in the natural resources business.

Dunand and Jaeggi started Mercuria in 2004 when they took astake in Poland-focused trade house J+S, but buying the largestoil and metals trader on Wall Street for $3.5 billion catapultsthem into the elite club of global commodity titans, alongsideGlencore Xstrata (Other OTC: GLCNF - news) , Vitol and Trafigura.

Dunand said on Wednesday he and Jaeggi's combined 60-plusyears of trading experience, starting at agricultural dealerCargill before rising through the ranks at storied commodityfirms such as Goldman Sachs (NYSE: GS-PB - news) ' J.Aron operation andoil-trader Phibro, had prepared them for the challenge.

"I could of course tell you that I want to be the king ofthe world but the reality is we are changing to adapt," Dunandtold Reuters. "We want to be fast growing in an ever changingworld. Our model is very much between a traditional tradingcompany and a bank."

Few would rule out further expansion.

Mercuria, named after the Roman god of trade, was growingrapidly even before the JPMorgan purchase. Turnover in 2013 wasabove $100 billion for the first time, with profit estimated atover $400 million. The firm's current 700-strong headcount willlikely expand markedly after the JPMorgan purchase. The bank'sphysical commodity division currently employs around 600 people,including traders and commercial operators

The total value of the deal was $3.5 billion, JPMorgan saidin a statement, slightly higher than the $3.3 billion the bankvalued its physical operations in an early prospectus, accordingto industry sources. The all-cash deal is expected to concludein the third quarter this year.

The business includes a large North American energyoperation, including vast storage tanks near the Canadian oilsands, substantial gas and electricity trading operations, and asupply and trading deal with one of the largest refiners on theEast Coast of the United States.

It also includes the Henry Bath metals warehousing business,which should help Mercuria's metals trading operation, led byex-Barclays (LSE: BARC.L - news) commodities chief Roger Jones since last year.

Dunand said valuing the JPMorgan business, hammered out inNew York since the firms entered exclusive talks last month, wasan ever-changing target, as it included the bank's stockpiles ofindustrial metals and oil.

"The complexity of the deal was massive," Dunand said.

"You have to agree on every word in 1,500 pages ofdocuments. And you are buying a moving thing, because JPMorgan'straders keep trading."


Dunand said while the company had no plans to go public likeLondon-listed Glencore, it was still looking to sell asizeable stake in the firm to a strategic investor in Asia.

That plan, which could see a long-term buyer take as much as20 percent of Mercuria, was first aired last year, but put onhold while they finalised the JPMorgan deal.

Dunand and Jaeggi, both in their early 50s, still own almostone third of Mercuria between them, with around half belongingto senior employees through equity schemes.

The remaining share remains with J+S's founders, includingGrzegorz Jankielewicz and Slawomir Smolokowsk, who focused theirbusiness on supplying Polish refiner PNK Orlen with Russian oil.

The J+S business expanded into shipping Russian oil toChina, before Jaeggi and Dunand, fresh from starting U.S. energyfirm Sempra's European trading business, were brought on board.

In June 2004, shortly after launching Mercuria, Dunand toldReuters "the ultimate step is to have your skin in it," for anytrader looking to make their fortune.

"Mercuria has been such a fast growing company that it feelsnormal to see them expanding this way," said Olivier Jakob, anoil analyst at Petromatrix in Zug, Switzerland.

"In terms of management it is a bigger challenge. It'salways a little more challenging to expand the business throughacquisition rather than through internal growth."

Jakob said Dunand and Jaeggi were widely respected as strongleaders, but firms such as Vitol, Glencore and Trafigura wouldbe prepared for the challenge of a newly-expanded rival.

One question mark hanging over the deal is Mercuria'sability to absorb a large bank team into their existing culture,something JPMorgan initially struggled with after its rapid-fireacquisition strategy at the end of the last decade, includingthe physically-orientated RBS Sempra business.

"It will be interesting to see whether Mercuria will want tokeep us on or not, and whether they will attempt to move ourdesks to Geneva," one JPMorgan trader in London said.

"Most of us want to stay here."

But industry sources say Mercuria has always been keen tohire big-name traders away from banks, a trend that hasaccelerated since the financial crisis, with Wall Street facinggreater restrictions on bonuses and proprietary dealing.

"If you look at their biggest hires over the last couple ofyears they've been one of the biggest beneficiaries of the trendfor commodity traders to leave banks for trading houses," saidJake White, head of front-office commodities recruitment atSelby Jennings in London.

"There's always a cultural change to get over, especially ifanyone is relocating from London to Geneva, but Mercuria areperhaps better placed than most to manage this."


One of the biggest potential benefits for Mercuria is thatthe deal will vastly expand its capabilities in North America,where the energy trading landscape has been upended by the shaleoil revolution.

Pipeline bottlenecks and the growth of crude-by-rail hascreated numerous opportunities for savvy trading firms to makemoney by arbitraging price differences on crudes and refined oilproducts around the continent.

The JPMorgan business will give Mercuria one of the largeststakes in the fast-growing U.S. crude-by-rail patch, helping toship almost a fifth of the shale oil produced in the Bakkenfields of North Dakota to Philadelphia Energy Solutions' 350,000bpd refinery on the U.S. East Coast.

The so-called "supply and offtake" deal with that plantwill also give Mercuria a stronger foothold in the key NY Harborrefined products market, which plays a significant role insetting the price of gasoline, diesel and heating fuel consumedin the United States.

"In that respect we want to be in the U.S., we want to bepart of those plays that the U.S. shale revolution has created,"Dunand said. "We want to go into value chains and be in placeswhere we see imbalances."

Significantly, Mercuria will get access to the JPMorgan'slong-term leases on over 6 million barrels of crude oil storagein Hardisty, Alberta, the heart of Canada's oil sands industry.

Alongside Mercuria's existing stakes in a Canadian oil sandsproducer, this could give it greater insight into the region, asbooming production and limited pipeline capacity create newtrading opportunities.

After completing such a large deal with JPMorgan, Dunand isguarded about future plans, but didn't rule out acquisitions.

"I really don't know what the next big step for us couldbe," Dunand said. "We want to remain flexible. Essentially weare laying out a platform which can quickly react to marketchanges. There are loads of opportunistic ways of growing."

Speaking to Reuters shortly after forming Mercuria out ofJ+S back in 2004, Dunand stated that for him and Jaeggi: "Thisis the last move."

Ten years on, it's a promise you can't imagine him makingagain. (Reporting by Dmitry Zhdannikov in New York and David Sheppardin London; Additional reporting by Sue Thomas, HenningGloystein, Ron Bousso and Shadi Bushra in London, editing byDavid Evans)

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