HKEX's $ 36.5 billion bid on LSE faces challenges for China's role

HONG KONG – Just a few months ago, David Schwimmer, chief executive of the London Stock Exchange Group, lamented how cross-border mergers on the stock market are so often disrupted by the political opposition.

"This nationalist focus will continue to be focused on trade in particular," Reuters was quoted as saying at the FIA's international derivatives exhibition in June. "I think it's hard to think about making big cross-border trade-type transactions, it seems difficult for the industry."

While his comments referred to LSEG's multiple unsuccessful attempts to merge with the German group Deutsche Boerse, this week Schwimmer was at the end of an offer when Hong Kong Exchanges & Clearing launched a takeover bid Unsolicited £ 29.6 billion ($ 36.5 billion) on the London Stock Exchange. .

Investors, analysts, and authorities almost immediately questioned the success of this proposal, not least because HKEX's largest shareholder is the Hong Kong government, which many see as an indirect proxy for Beijing. The Hong Kong government also appoints six of the 13 board members of the stock market.

LSEG said this week that it would consider the "highly conditional" proposal and respond "in due course". The Financial Times reported on Thursday that HKEX was ready to "soften the terms" of the offer, but added that the LSEG was about to reject the offer.

The reaction of the shares was also revealing: after an initial rise of 16%, the shares of LSEG reduced their earnings to end at only 6% to 72.14 pounds Wednesday. This compares to the HKEX proposal which gives LSEG a value of 83.61 pounds. LSEG shares rose 0.6% Thursday to 72.52 pounds.

Shares of HKEX, which announced its bid on Wednesday at the close of trading, tumbled 3.5% to 237.40 Hong Kong dollars ($ 30.28) on Thursday, but rose 0.5%. beginning of session Friday.

The HKEX offer is an attempt to create a global trading power composed of stocks, commodities, derivatives and clearing in financial centers on two continents. He emphasized the commercial logic of the agreement to link the substantial savings of Chinese investors to the rest of the world, saying that such an agreement would create a globally connected exchange group that would serve as a platform for international form for financial assets denominated in US dollars. dollars, euros and yuan.

A spokesman for the UK Treasury, quoted by Reuters, said the LSEG was an "extremely important element" of the UK financial system, adding that the government and regulators would be looking "closely" at the details of the proposed deal .

Analysts were also kept in mind, saying that the political opposition in Britain – which has always derailed the links between national stock exchanges – was probably going to be even more lively this time in the face of concerns over the future. 39, an attempt by China to take control of a financial instrument of global importance. intermediate. The security of data and information held by these institutions is equally worrying.

For example, Huawei Technologies, the world's largest producer of telecommunications equipment, is being scrutinized in the West for its links to the Chinese government and state-sponsored espionage charges. Washington has called on its allies to stop using Huawei equipment.

While Hong Kong operates under the legal framework "one country, two systems", China worries more and more of the autonomy of the city, highlighted by three months of street protests and sometimes protests violent against the governments of Hong Kong and Beijing.

David Blennerhassett, an analyst at Ballingal Investment Advisors, wrote in a note to Smartkarma's customers that the public takeover bid on LSEG could be considered an "indirect takeover" by China.

"The transaction will require various regulatory approvals, which will test the world's understanding of the" one country, two systems "constitution of Hong Kong," he said in the note. "It will be politically difficult, now and in the short term, to do so through a variety of regulatory channels."

Bank of America analysts Merrill Lynch and Citigroup also said the proposal would face extremely high regulatory hurdles.

Certainly, several attempts to merge swaps over the past two decades have also failed. LSEG first attempted to merge with its German counterpart in 2000, the last failed attempt in 2017, after the European Commission had expressed concerns about competition. In 2011, the Australian government prevented the Singapore Exchange from buying the Australian Securities Exchange, citing a national interest.

In the midst of these repressions, the LSEG group has instead focused on more modest transactions, such as the purchase of a majority of the UK LCH clearing house in 2013 and earlier this year by taking a stake in the company Euroclear settlement and delivery system based in Brussels. Last month, the group agreed to buy the Refinitiv data company for $ 27 billion, betting on the prevalence of financial information and analysis.

It was the Refinitiv agreement that prompted HKEX CEO Charles Li to act before it was too late to acquire the LSEG, which he has long admitted. HKEX's offer is conditional upon LSEG canceling its contract to acquire Refinitiv, but the London Stock Exchange has indicated that it remains committed to its proposed Refinitiv purchase and is continuing to make good progress.

In a press conference on Wednesday, Li said his company's proposal was fundamentally different from LSEG's plan to acquire Refinitiv and that this project would generate "superior growth".

"The HKEX offer is more likely to face regulatory challenges compared to the LSEG-proposed Refinitiv acquisition," said Fitch Ratings. "The Chinese authorities' increased control over Hong Kong could also raise the concerns of UK and US regulators on data and information security."