Hong Kong has been in the grips of political upheaval and pro-democracy protests for months. Britain is on the precipe of Brexit. If that weren’t enough drama, a marriage between two of the world’s major stock exchanges may now be in the works.
On Wednesday, Hong Kong Exchanges and Clearing Limited (HKEX) made a surprise $39bn takeover bid for the London Stock Exchange Group (LSE), with the aim of sabotaging the LSE’s acquisition of data company Refinitiv.
The unsolicited proposal is contingent on the LSE ditching its $27bn Refinitiv deal, which has been well-received by investors as a path to creating a global trading powerhouse.
The LSE said it would review HKEX’s proposal, but added that it was committed to – and continuing to – make good progress on its planned acquisition of Refinitiv from a consortium led by United States private equity firm the Blackstone Group.
HKEX’s offer, which some investors and analysts say could face serious political hurdles, is aimed at creating a combined group better able to compete with US rivals such as the Intercontinental Exchange and the CME Group exchange.
“The board of HKEX believes a proposed combination with LSE represents a highly compelling strategic opportunity to create a global market infrastructure leader,” the Hong Kong exchange said in a statement.
HKEX, whose main shareholder is the Hong Kong government, said its 31.6-billion-pound sterling ($38.93bn) cash-and-share transaction proposal represented a 22.9 percent premium to the LSE’s closing stock price on Tuesday.
“It looks uncertain whether shareholders will accept the offer, given that the Refinitiv deal is popular across the shareholder base for its potential to transform the business and add value over the long term,” said Guy de Blonay, a fund manager at Jupiter Asset Management, a top-25 investor in the LSE.
Such sentiments, plus the potential difficulties facing a Hong Kong company trying to buy one of Britain’s marquee financial institutions – which also owns the Milan exchange and is a major clearing house in the US – pared market enthusiasm.
Refinitiv declined to comment. Its majority shareholder, Blackstone, had no immediate comment, while minority shareholder Thomson Reuters declined to comment.
Reuters news agency is a unit of Thomson Reuters.
A backdrop of political turmoil
The LSE has long sought to bolster its presence in Asia. However, the proposed takeover comes at a time when Hong Kong is beset by turmoil. Pro-democracy protesters lit fires and vandalised a metro station near the exchange on Saturday as increasingly violent clashes with police move into their fourth month.
“This is not helpful. As a financial centre, trust and confidence are important,” HKEX boss Charles Li Xiaojia said of the protests last month, when HKEX reported a 21 percent fall in trading fees in the first half of the year.
Some analysts saw the Hong Kong takeover approach as a defensive move to prevent the LSE from becoming a bigger rival with the Refinitiv deal, which would transform the London exchange into a market data and analytics giant.
Political opposition has historically scuppered tie-ups between national exchanges, and analysts said that could be a key barrier in this case. In recent years, Western governments have become increasingly sceptical of takeovers by Chinese companies due to concerns about interference from Beijing.
While Hong Kong has a separate regulatory framework from Beijing, a perception that China is increasingly asserting its control over the territory has fuelled months of protests in the former British colony.
“Do you as a LSE shareholder now fancy ditching your LSE stock in favour of a Hong Kong-listed share?” asked Neil Wilson, chief market analyst at Markets.com.
British Secretary of State for Business, Energy and Industrial Strategy Andrea Leadsom told Bloomberg Television that Britain welcomed foreign investment but would “look very carefully at anything that had security implications”.
HKEX has been the world’s largest listings venue in five of the past 10 years, splitting the crown over that decade with the New York Stock Exchange (NYSE), according to Refinitiv data.
But this year it has fallen behind, raising $10.8bn to the NYSE’s $20.2bn, with activity suffering as the political turmoil deepened. Last month, e-commerce company Alibaba Group delayed plans for a $15bn offering because of the unrest.
The approach by the Hong Kong company comes as Britain is set to leave the European Union, a step some politicians fear could weaken its status as a major financial centre.
HKEX, which already has a base in London as the owner of the London Metal Exchange (LME), said it had played a key role in underpinning the City of London’s position as a pre-eminent global centre for metals trading.
“HKEX is fully committed to supporting and building the long-term roles of both London and Hong Kong as global financial centres,” it added.
Investor sounds caution
A top-10 shareholder in the LSE, who declined to be named in line with his company’s policy during potential mergers, sounded a cautious note about the prospects of a successful takeover of the exchange.
“HKEX bought LME a few years ago to have a presence in the UK already, but clearly they are trying to diversify away from their Chinese exposure, which is why they are bidding now and not nine months ago,” he said.
“Shareholders won’t be rushed to make a decision as we like the Refinitiv deal,” he added.
A successful Hong Kong bid for the LSE would end Blackstone’s lucrative deal to sell Refinitiv. It would also scupper plans to refinance some $13.5bn worth of leveraged loans and bonds that were issued to pay for Refinitiv with investment-grade bonds issued by the LSE.
Prices of bonds issued by Refinitiv were only slightly lower in secondary trading on Wednesday, implying continued investor confidence in the company’s tie-up with LSE.
The approach is the latest international attempt to acquire the LSE. Germany’s Deutsche Borse Group has failed three times in recent years, hitting opposition from politicians and regulators.
LSE CEO David Schwimmer has said that big takeovers in exchanges are difficult due to political concerns, and in recent years the LSE has sought to diversify away from basic trading and clearing to data and analytics.
The Asian exchange, however, said it was confident its proposal faced no major regulatory hurdles due to little overlap in markets.
HKEX said it has already begun discussions with certain regulators in Britain and Hong Kong. “The board of HKEX believes that the two businesses are highly complementary and as such, looks forward to working with the relevant authorities to deliver a clear path to completion,” it added.
Should the proposed takeover be successful, it is expected that key LSE management would continue to operate LSE businesses, HKEX said.
The Hong Kong government threw its support behind the move.
“The government is glad to see HKEX’s endeavour to enhance its core strength and seek international expansion in accordance with its strategic plan,” a spokesman said.
The UK Treasury declined to comment on commercial matters.
HKEX said that under the terms of the deal, LSE shareholders would receive 2,045 pence ($25.20) in cash and 2.495 newly issued HKEX shares. It said it intended to apply for a secondary listing of its shares on the LSE once the deal has gone through.