Dealtalk: Korea Exchange hamstrung in IPO, global M&A

SEOUL Mon Mar 21, 2011 2:57am EDT

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SEOUL (Reuters) - Korea Exchange, one of Asia's few privately-held major bourses, is pressing to go public to compete in a fast-consolidating industry, but regulators look set to stymie any deal for the world's largest derivatives operator.

The face of global finance is being transformed by a flurry of mergers, from a proposed tie-up between NYSE Euronext NYX.N and Deutsche Boerse (DB1Gn.DE) to the Singapore Exchange's (SGXL.SI) $7.3 billion bid for the Australian Securities Exchange (ASX.AX).

Yet South Korea, Asia's fourth largest economy, seems insulated from all of it and may risk losing some of its own blue chips after having failed to win business for foreign listings in competition with the likes of Singapore and Hong Kong.

"The Korea Exchange is a monopoly and as the country's sole exchange, a lot of public interests are vested into it," Cho In-kang, capital markets deputy at Financial Services Commission (FSC), told Reuters.

"We are not that sure growing bigger through acquisitions would be entirely beneficial," Cho said.

The FSC, along with the Finance Ministry, oversees the KRX.

RISK OF BEING MARGINALISED

The KRX is the world's biggest derivatives exchange and its volume of futures and options is higher than that of global bourses such as CME Group (CME.O), NYSE Euronext and Nasdaq OMX (NDAQ.O). More than 3.7 billion contracts were traded on the KRX last year, versus 3 billion for closest rival CME.

It also draws a fairly large volume of liquidity and boasts blue chip companies such as Samsung Electronics Co (005930.KS), Asia's most valuable technology company, as its members.

As global consolidation ramps up, however, KRX risks losing some of its top companies to more globally connected groups, analysts say.

"KRX is isolated from the outside world... It may just end up being an even smaller local player with modest liquidity," said Kim Joon-seok, a research fellow at Korea Capital Market Institute.

KRX says going public is a must to raise enough capital to fund investment, which could include buying an exchange operator overseas or a stake in one, as well as helping emerging markets set up exchanges.

KRX's growth strategy has focused so far on a string of small deals with minor bourses in Southeast Asia such as those of Cambodia and Laos, a blueprint that can only take it so far, analysts say.

KRX established a joint venture with Bank of Laos to set up the South East Asian nation's stock exchange, which opened in January this year. Cambodia's stock exchange, 45 percent owned by KRX, is due to start operations this year.

But it has been put under tighter regulatory scrutiny after Korea named it a "public entity" in 2009, subjecting it to even closer government scrutiny and virtually making it impossible to seek the IPO.

An attempt to undertake an initial offering in 2007 was stopped by the South Korean government amid arguments over how the raised capital would be distributed.

The exchange operator, owned by dozens of brokerages and financial institutions, has not revealed how much money it would like to raise or whether it would look to impose ownership caps to prevent a takeover.

The government, which does not have a stake in the firm, is worried about adverse public reaction to an IPO that would enrich shareholders who have enjoyed strong profits thanks largely to its monopoly.

The exchange made an operating profit of $120 million on revenues of $326 million in 2009.

"KRX has to move quickly to avoid being isolated...and an IPO is compulsory to our survival," its CEO Kim Bong-soo, a former head of a local brokerage house, told reporters last month.

(Editing by David Chance and Lincoln Feast)

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