Reuters: Deals: ICAP buys VIP Commodities, beats out rivals

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ICAP buys VIP Commodities, beats out rivals Apr 2nd 2012, 19:42 Michael Spencer, Chief Executive of ICAP, listens during a Future of Finance Initiative conference in Horsham, southern England December 8, 2009. Credit: Reuters/Stefan Wermuth By Rene Pastor NEW YORK | Mon Apr 2, 2012 3:42pm EDT NEW YORK (Reuters) - ICAP Corporates (IAP.L) has bought VIP Commodities, beating out bids from three other firms, to form a full service cotton broking team in a market roiled by a historic rally and volatility that has driven some trading houses out of business. ICAP has taken on three VIP Commodities cotton brokers -- founder and owner Vincent Pepe, Louis Barbera, and Marco Degennaro -- as part of the acquisition. "This is a good deal for both parties," Pepe, founder and owner of VIP Commodities, told Reuters in an interview. "They help us by expanding our client base." Pepe declined to identify the other bidders for VIP Commodities and said he would not discuss money matters about the transaction. Pepe began his career as a 'runner' in the defunct New York Coffee, Sugar and Cocoa Exchange (CSCE), which eventually was bought by the New York Board of Trade, the predecessor of ICE. Runners scamper furiously to file orders from the floor ring where commodities such as sugar and cotton are traded. Barbera told Reuters that VIP no longer exists and has been replaced by ICAP Cotton. "All they do is fill orders," a former customer of VIP Commodities said. "They don't do any clearing. That's done through whoever is their customer. They just fill 'em and bill 'em." The deal marked the first major shake-up of the volatile cotton market since volatility rocked the market last year. A rally pushed prices to all-time highs of $2.27 a lb last March only to see demand shrivel and pull prices back down by more than half. Cotton is the second biggest agricultural commodity market on the ICE Futures U.S. exchange as measured by open interest. Cotton's open interest stood at 192,184 lots by the end of the first quarter of 2012, well ahead of cocoa and coffee, but behind raw sugar's open interest of 735,849 lots. Market volatility has taken a toll on major market players such as Glencore (GLEN.L), which lost an estimated $330 million on cotton last year. But Barbera said volatility did not impact the decision to sell VIP Commodities. "No, it had nothing to do with it. We've been consistent with our earnings," he said. In 2008, major merchant Paul Reinhart filed for bankruptcy protection because of losses it sustained when cotton prices spiked in March of that year. Another merchant, Weil Brothers, announced in November 2008 that it had withdrawn from the cotton business because of what it called difficult market conditions. In August 2009, Allenberg Cotton bought out leading merchant and rival Dunavant Enterprises in what traders then said was part of the fallout from the 2008 price surge. Allenberg is wholly owned by trading giant Louis Dreyfus and Dunavant was a major independent cotton merchant. Analysts have noted that being a smaller player in any of the commodities is increasingly difficult given price volatility and tight credit from banks in the last year. ICAP was an ideal buyer for VIP, Barbera said. "We think it's a good fit. They have a deep client base," Barbera said, adding the deal should allow his firm to expand its OTC and derivatives business. While the bulk of VIP's business was in cotton, its traders had also done business in sugar, cocoa and coffee, he added. "This means that someone wanted a broker in cotton. I do not believe the meaning of this transaction goes much beyond that," said a senior analyst in the southern United States. Another broker said cotton would only form a modest part of ICAP's business, especially since the cotton trade is dominated by Allenberg and Cargill, the biggest cotton trading operations in the world. An ICAP spokesman told Thomson Reuters that the deal allows it to expand into cotton and grow its business. "ICAP continues to grow in our already-core business of softs (commodities) and ags (agricultural futures and options). Cotton was the next logical step," the spokesman said. (Reporting By Rene Pastor; editing by Jim Marshall) Link this Share this Digg this Email Reprints

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