JP Morgan's $1.7 Billion Deal to Boost Its Stance in Global Commodities

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In the global financial services market, governments are becoming the kingmakers. Just look at J.P. Morgan Chase's (JPM) $1.7 billion acquisition of the non-US operations of RBS Sempra Commodities. Royal Bank of Scotland Group (RBS), which is the co-owner of the joint venture along with Sempra Energy (SRE), had little choice in the matter. The firm received $71 billion in taxpayer funds because of the global financial crisis and as a result, European Union rules required that the holding be divested.And this may not have been the only governmental influence. It also looks like JP Morgan readjusted the deal because of President Obama's recent bank reform proposal.

The Deal

When JP Morgan purchased Bear Stearns Cos. in 2008 -- using massive federal support -- the firm saw some key opportunities. These included a decent investment bank, a prime brokerage division and a strong fixed-income and equity-trading operation.

But there was something else that was quite lucrative: Bear's energy trading business.

After the deal closed, JP Morgan continued its acquisitions in this fast-growing market. Some of the deals included the purchase of the Canadian commodities business of UBS (UBS) and the acquisition of ClimateCare, which focuses on carbon emissions trading.

Despite all this, JP Morgan's footprint was still relatively small, at least compared to other major operators like Morgan Stanley (MS), Barclays (BCS) and Goldman Sachs (GS), which have made fortunes from commodities trading.

However, with the acquisition for RBS Sempra Commodities, JP Morgan is now in the same league as its rivals as it will double its customer base to 3,000. The transaction also provides roughly 30 million barrels of crude storage capacity, a variety of leased tankers, an extensive warehouse network and a freight system in Asia.

Obama blocked the best part?


So why didn't JP Morgan also purchase the North American part of RBS Sempra Commodities? After all, that business is thriving as well.

It's true that JP Morgan also has a strong presence in North America, especially with its Bear Stearns operation. But the unstated reason may be that the firm is concerned about President Obama's plan to forbid banks from engaging in proprietary trading. If this is so, it looks like foreign operations may not apply.

But this is good news for Sempra, which can buy up the remaining part of the North American joint venture and capture all the cash flows for itself. More importantly, the firm now has a windfall to do the deal.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.
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