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FILE PHOTO: Hong Kong's name Exchanges and Clearing Limited is posted at the entrance of Hong Kong, China, January 24, 2018. REUTERS / Bobby Yip / File Photo
September 11, 2019
Huw Jones and Sinead Cruise
LONDON (Reuters) – Hong Kong Stock Exchanges and Clearing Ltd (HKEX) <0388.HK> unveiled $ 39 billion takeover approach to the London Stock Exchange Plc (LSE)
To make it happen, HKEX should persuade British politicians and European regulators to give up their deep-rooted skepticism about mergers of financial exchanges.
It should also appeal to LSE shareholders who wish to retain their stake following LSE's $ 27 billion purchase last month to acquire the Refinitiv financial data provider. A disturbing sign for the outlook for the deal, the LSE shares closed their trading on Wednesday with a significant reduction in the HKEX bid price.
With its offer, HKEX is betting that a major international acquisition will help it overcome the uncertainty at home. Hong Kong's pro-democracy protests against China's political influence in recent weeks have raised questions among major corporations and investors about the Hong Kong Stock Exchange's call.
HKEX is also looking to take advantage of the weakness of the pound sterling, which was hit by Britain's inability to reach an agreement on the exit of the European Union. The weaker British pound has made UK companies cheaper for foreign buyers.
The proposed agreement aims to create a combined group better able to compete with US competitors such as Intercontinental Exchange Inc.
"The HKEX Board of Directors believes that a combination proposed with LSE represents an extremely compelling strategic opportunity to create a global leader in market infrastructure," said the Hong Kong Stock Exchange in a statement. communicated.
The LSE said it would review the HKEX proposal. As a sign of its modest response to the HKEX offer, she added that she had committed to continue her plan to acquire Refinitiv from US-based private equity firm Blackstone Group Inc.
Refinitiv spokespeople Blackstone and Thomson Reuters declined to comment.
Under the terms of the offer, LSE shareholders would receive 2,045 pence in cash and 2,495 newly issued HKEX shares. HKEX has announced its intention to request a secondary listing of its shares on the London Stock Exchange after the closing of the transaction.
HKEX, whose largest shareholder is the Hong Kong government, said its proposed cash and equity transaction of £ 31.6 billion represented a premium of 22.9% over the closing price of the Hong Kong Stock Exchange. London of 8,361 pence.
LSE shares finished trading on Wednesday, up 5.9% to 7,206 pence. HKEX's significant bid price differential reflects widespread skepticism about the success of the offer, investors said.
A key challenge is to gain the support of the UK government, which has already signaled a certain mistrust of transferring control of its stock market to a foreign buyer with close ties to China.
The UK Treasury has described the LSE as an "extremely important part" of the UK financial system. "As you can imagine, the government and the regulators will look closely at the details (of the proposed agreement)," said a spokesman.
"It seems uncertain that shareholders will accept the offer because the Refinitiv agreement is popular among shareholders for its potential for transforming the company and creating long-term value," said Guy. Jupiter's fund manager, Blonay, among the top 25 LSE investors.
A Hong Kong-based company acquiring a reputable UK financial institution – which also owns the Milan Stock Exchange and a major US clearing house – would be a major challenge for HKEX.
Deutsche Boerse in Germany
It was also unclear whether the US Committee on Foreign Investment (CFIUS), a government group charged with reviewing agreements to determine potential national security issues, would also have jurisdiction to review the offer. from HKEX on LSE, analysts said.
A spokesman for the US Treasury Department, who chairs CFIUS, did not respond to a request for comment as to whether the transaction would be subject to CFIUS review.
The Blackstone Raffinity Affair at Play
The agreement between Refinitiv and LSE came just 10 months after Blackstone acquired a majority stake in the Thomson Reuters unit under a deal worth $ 20 billion.
LSE said it expects the Refinitiv acquisition to be finalized in the second half of 2020. If it went away, it would have to pay Refinitiv a demolition fee of 198.3 million pounds sterling.
Emboldened by the lukewarm reaction of the LSE shares, Blackstone remained on the spot Wednesday, believing that the chances of success of HKEX were distant, according to people close to the file.
Bond prices issued by Refinitiv were only slightly lower in secondary trading on Wednesday, suggesting that investors did not consider the deal with LSE as being at risk.
For an interactive version of this chart, click here https://fingfx.thomsonreuters.com/gfx/editorcharts/GLOBAL-MARKETS/0H001QX5W8BR/index.html
HKEX MADE BEHIND
According to Refinitiv data, HKEX has been the largest trading venue in the world in five of the last ten years and has faced the New York Stock Exchange during this decade.
But this year, it has fallen behind, earning $ 10.8 billion from the $ 20.2 billion New York Stock Exchange, but the business suffers as the political turmoil intensifies. Last month, Chinese e-commerce giant Alibaba Group Holding Ltd
No other offer for LSE has appeared on Wednesday. Benjamin Jackson, president of Intercontinental Exchange Inc., owner of the New York Stock Exchange, has put his company out of the process.
"The reasons are, you have uncertainty about Brexit, you have valuations, you have contracts that must meet our internal rate of return criteria that we have put forward," he said at the time. a conference on financial services at Barclays on Wednesday.
In an interview with Reuters on Wednesday, CME President and CEO Terry Duffy also criticized the idea of an offer to buy. "I just concluded my European transaction with NEX in November, and I'm focusing on integrating this technology and growing our core business," said Duffy.
David Schwimmer, CEO of LSE, said major takeovers in trading are difficult because of political concerns. In recent years, the LSE has sought to diversify from core operations and clearing to data and analysis.
The Asian stock market, however, said it was confident that its proposal did not encounter any major regulatory hurdles due to the low market overlap.
HKEX said it had already started talks with some UK and Hong Kong regulators. "The HKEX board of directors believes that the two activities are very complementary and therefore wishes to collaborate with the competent authorities to clearly define the way forward," he added.
If the proposed takeover was successful, it was expected that LSE's top executives would continue to operate, HKEX said.
The Hong Kong government has supported this initiative.
"The government is pleased to see that HKEX is striving to improve its core strength and seek international expansion in line with its strategic plan," said a spokesman.
(Additional reports by Jennifer Hughes and Alun John in Hong Kong, John McCrank, Chibuike Oguh and David French in New York, and Yoruk Bahceli and Abhinav Ramnarayan in London, edited by Nick Zieminski and Howard Goller)
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