HKEX in bold 30b bid for London stock exchange

Top News | Bloomberg and Stella Zhai 12 Sep 2019

Hong Kong Exchanges and Clearing has made a surprise offer for the London Stock Exchange Group, valuing one of Europe's largest exchanges at 29.6 billion (HK$286.76 billion).

Under the proposal, HKEX would offer 2,045 pence as well as 2.495 newly issued HKEX shares per LSE share. That values each LSE share at 8,361 pence, representing a premium of 22.9 percent to the closing share price of 6,804 pence on September 10, the Hong Kong exchange said in its statement.

The LSE price rose 3.88 percent to 7,068 pence by noon yesterday after earlier surging as much as 16 percent to a record high 7,922 pence.

HKEX (0388) had considered the "ambitious and far-reaching" deal for one of Europe's largest exchanges for many months, chief executive Charles Li Xiaojia said yesterday.

The proposed transaction would be financed through a combination of HKEX cash resources and new credit facilities. HKEX intends to apply for a secondary listing of HKEX shares on the LSE if the acquisition is completed, reflecting HKEX's commitment to Britain, said HKEX.

LSE's board remains committed to the acquisition of data provider Refinitiv, highlighting the hurdles facing an offer that it called "unsolicited, preliminary and highly conditional." The board said it would consider the proposal and make a further announcement later.

The Refinitiv deal was a bet by LSE on a future dominated by data, as the three-century-old exchange looks for ways to extend its global reach. Acquiring Refinitiv, the former financial and risk unit of Thomson Reuters, would help the London exchange expand further into data analysis.

A HKEX-LSE pact would put an end to the Refinitiv purchase, instead creating a global trading power that would have stock, derivatives and commodities exchanges, as well as clearinghouses across two continents.

Both exchange operators have been involved in merger deals in recent years, with LSE failing in its attempt to combine with Deutsche Boerse AG and HKEX acquiring the London Metal Exchange in 2012 for 1.4 billion.

LSE's efforts to merge with Deutsche Boerse were ultimately scuppered by political considerations. HKEX's proposed move could fall at the same hurdle, said Ronald Wan, chief executive at Partners Capital International in Hong Kong. "A takeover from Hong Kong, a special administrative region of China, could be seen as a takeover from China. It won't be easy to clear all the regulatory hurdles - the deal is super politically sensitive," he said.

British Business Secretary Andrea Leadsom said the British government would scrutinize any tie-up between the exchanges. Authorities would "look very carefully at anything that had security implications for the UK."

Li said earlier this year in the company's strategic plan that HKEX aims to be "globally connected" while being "China anchored."

In recent years he has tied business more closely to the Chinese mainland, in particular with the start of stock and bond trading links to markets in Shanghai and Shenzhen.

Hong Kong lawmaker and HKEX shareholder Christopher Cheung said he was concerned most about the offer price, and what LSE could offer to HKEX. Cheung, a veteran broker, said he thinks it's getting harder for HKEX to start more trading links with China, citing the US-China trade tension and the recent protests in the city against the growing influence of Beijing.

"If Hong Kong cannot count on itself to maintain its status as an international finance center, it is only natural to seek horizontal, inorganic growth through acquisition," he said.

Dickie Wong, executive director of Kingston Securities, said HKEX is ambitious with the potential acquisition as valuation is not cheap.

He said a premium of slightly less than 20 percent would be fair for both sides, and believes the future growth engine is definitely from mainland China, and not from Britain or Europe, given the no-deal Brexit and the downturn in the overall European economy.

Wong expects there will be pressure on HKEX's financial liquidity and also its share price today.

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