London - Wellington - Stock Exchange Tower
The Hong Kong Stock Exchange is in a tough battle with a bid of 39 billion dollars for the London Stock Exchange.
LONDON - Hong Kong Exchanges and Clearing Ltd (HKEX) (0388.HK) on Wednesday unveiled a $ 39 billion takeover plan for the London Stock Exchange Plc (LSE.L) (LSE.L) from investors who are Worried about the regulatory and financial hurdles, a clear response was received.
To assert itself, HKEX would have to convince British politicians and European regulators to abandon their deep-seated skepticism about financial center mergers.
It would also have to convince LSE shareholders who are in favor of holding their share after LSE's 27 billion dollar deal last month to take over financial data provider Refinitiv. LSE stocks ended Wednesday's trading at a steep discount on HKEX's offer price as a disastrous sign of business prospects.
With its offer, HKEX is counting on a major international acquisition to help overcome domestic insecurity. Hong Kong's pro-democracy protests over China's political influence in recent weeks have raised concerns among big business and investors about the attractiveness of the Hong Kong stock market.
HKEX is also trying to capitalize on the weakness of the British pound, which is affected by Britain's inability to agree on an agreement to leave the European Union. The weaker pound has made British companies more attractive to overseas buyers.
The objective of the proposed transaction is to create a combined group of companies that is better placed to compete with US competitors such as Intercontinental Exchange Inc (ICE.N) and CME Group inc (CME.O). The prerequisite for this is that LSE will give up the business for the acquisition of Refinitiv.
"The HKEX board of directors believes that the proposed merger with LSE represents an extremely interesting strategic opportunity to create a global leader in market infrastructures," the Hong Kong Stock Exchange said in a statement.
LSE said it will review HKEX's proposal. As a sign of cool attitude towards HKEX's takeover bid, the Board added that it had made good progress on the planned acquisition of Refinitive from its US affiliate Blackstone Group Inc (BX.N) and Thomson Reuters Corp. (TRI.TO) , Thomson Reuters is the parent company of Reuters News.
Speakers from Refinitiv, 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 stated that it wanted to apply for a secondary listing of its shares on the LSE as soon as the transaction was completed.
Hong Kong Exchange Lobby
HKEX, whose principal shareholder is the Hong Kong government, said its proposal for a cash and stock transaction worth XNUM billion billion represents a premium of 31,6% on the closing price of LSE on Tuesday from 22,9 Pence.
LSE shares ended trading on Wednesday with only 5,9% gains on 7.206 pence. The significant gap in HKEX's bid price reflects widespread skepticism that the offer will be successful, investors said.
A key challenge: securing support from the UK Government, which has already signaled some reluctance to transfer control of its stock to a foreign buyer with close ties to China.
The UK Treasury Department described the LSE as a "critically important part" of the UK financial system. "As you can imagine, the government and regulators will be looking closely at the (proposed deal) details," a spokesman said.
“It looks uncertain whether shareholders will accept the offer as the refinitive transaction is popular across the shareholder base as it has the potential to transform the business and add value over the long term,” said Guy de Blonay, fund manager at Jupiter, one of the 25 largest investors on the LSE.
A Hong Kong firm that buys one of the UK financial institutions, which also owns the Milan Stock Exchange and is a large clearing house in the US, would be a challenge for HKEX.
Deutsche Börse (DB1Gn.DE) has failed to buy the LSE three times over the last few years, encountering opposition from politicians and regulators.
It was also not immediately clear that the Foreign Investment Committee in the United States (CFIUS), a government body investigating business for potential national security concerns, would also be responsible for reviewing HKEX's bid for the LSE, analysts said.
A US Treasury spokesman chairing CFIUS did not respond to a request for comment on whether the transaction would be reviewed by CFIUS.
BLACKSTONE'S REFINITIVE DEAL IS AT STOCK
Refinitive's deal with LSE came only 10 months after Blackstone had acquired a controlling stake in Thomson Reuters LSE in a deal over 20 billion dollars.
LSE has stated that it expects the refinance acquisition to be completed in the second half of the year, 2020. If they retired, the company would have to pay Refinitive a separation fee of 198,3 million pounds.
Encouraged by the restrained reaction in LSE's stock prices, Blackstone remained calm on Wednesday and considered HKEX's chances of success low, according to experts familiar with the matter.
The prices of the bonds issued by Refinitiv were only marginally lower on Wednesday in secondary trading, suggesting that investors did not see the deal with the LSE endangered.
HKEX DEVICE IN RESPONSE
According to Refinitiv, HKEX has been the world's largest stock exchange for five of the last 10 years and has held its own against the New York Stock Exchange this decade.
However, it has fallen behind this year, yielding 10,8 billion dollars over the NYSE's 20,2 billion dollars, with activity hampered by the heightened political turmoil. Chinese e-commerce giant Alibaba Group Holding Ltd (BABA.N) has postponed plans for a $ 15 billion-dollar IPO in Hong Kong over the past month due to the riots.
On Wednesday no further offer for the LSE appeared. Benjamin Jackson, president of the New York stock exchange owner Intercontinental Exchange Inc., brought his company out of the race.
"The reasons are, you have Brexit uncertainty, you have valuation procedures, you have deals that have to meet our internal return criteria that we have established," he said at a Barclays financial services conference on Wednesday.
In an interview with Reuters on Wednesday, CME chairman and CEO Terry Duffy also poured hot water over the idea of a takeover. "I just closed a European deal with NEX in November and my focus is on integrating that deal and growing our core business," said Duffy.
LSE leader David Schwimmer has said that big takeovers in exchange are difficult because of political concerns. In recent years, the LSE has attempted to diversify from simple trading and clearing to data and analytical activities.
However, the Asian stock market was confident that its proposal had no major regulatory obstacles due to the limited overlap in the markets.
HKEX said they have already started discussions with certain regulators in the UK and Hong Kong. "HKEX's board of directors believes the two companies are very complementary and look forward to working with the relevant authorities to find a clear path to implementation," he added.
Should the proposed acquisition be successful, LSE's management is expected to continue to operate LSE businesses, HKEX said.
The Hong Kong government supported the move.
"The government is pleased that HKEX sees efforts to strengthen its core areas and international expansion in line with the strategic plan," said a spokesman.
Source: Additional reporting 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; Editing by Nick Zieminski and Howard Goller, translation and editing ISE - September 2019
