Hong Kong Exchange bids to buy LSE ; any sale would stop Refinitiv takeover

Hong Kong Exchanges & Clearing Ltd. made an unexpected $36.6 billion bid for London Stock Exchange Group Plc, a bold move that would upend the U.K. bourse’s combination with Refinitiv.

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. Refinitive is the parent company of Municipal Market Data, Lipper and SDC.

LSE’s shares pared earlier gains, reflecting skepticism that a deal can be done in the face of unrest in Hong Kong and potential concern over Chinese ownership.

LSE executives and investors may also view the $27 billion takeover of Refinitiv, aimed as a push into financial data, as a more secure future than a multi-continental combination of stock exchange operators. For HKEX, the bet on London remaining a post-Brexit financial hub promises a base away from the increasingly fraught political climate at home.

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, the Hong Kong bourse said in its statement. The U.K. company’s stock rose 4.2% to 7,088 pence on Wednesday at 12:28 p.m. in London, after earlier surging as much as 16%.

The Asian bourse operator had considered the “ambitious and far-reaching” deal for one of Europe’s largest exchanges for many months, HKEX Chief Executive Officer Charles Li said ina statement Wednesday.

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 bourse expand further into data analysis.

An 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.

A successful takeover by HKEX would scupper plans by Blackstone Group Inc., which was part of a group that bought a majority stake in Refinitiv last year and would double its money if the LSE deal goes through.

In a media call after the bid was announced, Li said HKEX’s offer was “something fundamentally different” to the Refinitiv tie-up for LSE and its shareholders.

“Superior growth, superior strategic prospects and tremendously different and enhanced value creation for shareholders,” he said. “Growth prospects for both companies, and strategic positioning for both cities.”

BB-Charles-Li-BL
Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., speaks during the Credit Suisse Asian Investment Conference in Hong Kong, China, on Tuesday, March 26, 2019. The conference runs through March 28. Photographer: Paul Yeung/Bloomberg

Bloomberg LP, the parent of Bloomberg News and Bloomberg Intelligence, competes with Refinitiv and Thomson Reuters to provide financial news, data and information.

European exchange operators have outperformed the broader market this year, with LSE surging 77%, Euronext NV up 38% and Deutsche Boerse AG rising 30%.’

Both HKEX and LSE have been involved in dealmaking in recent years, with the latter failing in its attempt to combine with Deutsche Boerse and HKEX acquiring London Metal Exchange in 2012 for 1.4 billion pounds ($1.73 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 Ltd. 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.

U.K. Business Secretary Andrea Leadsom, speaking on Bloomberg Television as news of the deal broke, said the British government would scrutinize any tie-up between the exchanges. Leadsom said the U.K. authorities would “look very carefully at anything that had security implications for the U.K.”

HKEX was created in 2000 after the merger of stock and derivatives exchanges in Hong Kong. The company went public later that year.

Li said earlier this year in the company’s latest strategic plan that HKEX aims to be “globally connected,” while being “China anchored.” In recent years he has tied his business more closely to the Chinese mainland, in particular with the start of stock and bond trading links to markets in Shanghai and Shenzhen.

As well as its iconic stock exchange, LSE runs businesses including the world’s biggest over-the-counter derivatives clearinghouse, LCH Ltd.; index provider FTSE Russell; a European share trading venue called Turquoise; and Borsa Italia.

Hong Kong lawmaker and HKEX shareholder Christopher Cheung said he was most concerned that HKEX might overpay. Cheung, a veteran broker, said in an interview that he thinks it’s getting harder for HKEX to start more trading links with China, citing U.S.-China trade tensions and the recent protests in the city against growing influence from 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 by phone.

LSE may have allies in fending off bid
London Stock Exchange Group Plc Chief Executive Officer David Schwimmer can count on some powerful allies if he decides to fend off Hong Kong Exchanges & Clearing Ltd.‘s $36.6 billion bid for his marketplace.

While the offer represents a vote of confidence in London as a post-Brexit financial hub, officials in the U.K. and U.S. are likely to look skeptically at the world’s biggest venue for handling interest-rate swaps being so closely linked to China.

“This news comes at a hugely sensitive political moment,” said Scott Colvin, head of public affairs at Finsbury, a corporate public-relations firm. “This plays into the Brexit debate, the imminent general election, and relations with both the U.S. and China.”

Speaking to reporters from Hong Kong, Charles Li, HKEX’s chief executive officer, sidestepped a question about exploiting the weak pound, which has declined almost 20% since the 2016 Brexit vote. Instead, he touted the benefits of enabling two-way capital flows from East to West, “bringing together significant financial centers of Asia and Europe” and facilitating an 18-hour trading day.

RefinitivFor its part, the LSE has already pinned its future on a world dominated by data with its $27 billion bid for Refinitiv, the business that used to be Thomson Reuters Corp.’s financial and risk unit. It’s currently owned by a Blackstone Group Inc.-led consortium.

After the HKEX bid was announced, an LSE statement called the offer an “unsolicited, preliminary and highly conditional proposal” and said a further announcement would be made in due course.

LSE senior managers were blindsided by the offer, said a person familiar with the situation who asked not to be named discussing matters that aren’t public. Internally, recent meetings have concentrated on the significant benefits of the Refinitiv deal, the person said.

With global political tensions rising -- including protests in Hong Kong and U.S. President Donald Trump’s trade war with China -- commercial arguments may not be the most compelling. U.S. regulators last year rejected a bid by a Chinese-linked consortium to take over the Chicago Stock Exchange, a deal that then-candidate Trump blasted when it was announced in 2016.

‘Security Implications’In London, U.K. Business Secretary Andrea Leadsom said the U.K. would “look very carefully” at anything with “security implications.” The British political class may also be unwilling to court controversy given the drama over delivering Brexit.

To be sure, Britain has sought closer financial ties with China and the U.K.’s biggest bank, HSBC Holdings Plc, generates more than half its profits in Hong Kong.

“The U.K. and even Theresa May went to China after the Brexit referendum was over, trying to lure them into a trading agreement,” said Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies. “Why would the U.K. all of a sudden oppose this?”

Political RiskKeefe Bruyette and & Woods analysts led by Kyle Voigt said in a note that the HKEX bid has higher political risks than the Refinitiv deal, and that LSE shareholders who view the Refinitiv transaction favorably see value creation well above the offer price. It said that the 14.5% premium to Friday’s close wouldn’t be attractive enough for shareholders to walk away from Refinitiv.

Schwimmer said in public comments in June that he believed nationalist interests made cross-border exchange mergers nearly impossible.

Louis Capital analyst Ben Kelly said he didn’t expect a deal to be consummated, citing likely political opposition over national security concerns.

History is littered with failed attempts to complete cross-border exchange mergers including at least three attempts by the LSE to combine with Deutsche Boerse AG. The final plan to sell LSE to Deutsche Boerse to create a $30 billion behemoth fell apart when regulators blocked the deal in 2017.

Singapore Exchange Ltd.’s $8.8 billion bid for ASX Ltd. collapsed after the Australian government said the deal wasn’t in the national interest.

European Union regulators vetoed Deutsche Boerse and NYSE Euronext’s plan to create the world’s biggest exchange after concluding that the merger would hurt competition.

Nasdaq OMX Group Inc. and Intercontinental Exchange Inc. abandoned an unsolicited bid for NYSE Euronext in 2011.

“The U.K. government may not wish to see such a vital symbol of U.K. financial-services strength, and indeed a strategic asset, to be owned by foreigners,” said Neil Wilson, chief market analyst at Markets.com. “One rather feels U.K. shareholders will be looking at the glass half empty as far as exposure to Hong Kong goes right now.”

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