By Nathan Layne
TOKYO, July 5 Opposition from overseas funds has raised questions over whether Japan's two major stock exchanges will succeed with their merger plan at the proposed buyout price having received the go-ahead from regulators.
Japan's anti-monopoly watchdog, the Fair Trade Commission, announced on Thursday that it had approved the combination of the Tokyo Stock Exchange and the Osaka Securities Exchange to create the world's third-biggest equities exchange.
The companies first announced their plans to merge in November. In the first step of the transaction, the unlisted TSE plans to buy up to two-thirds of the OSE in a tender offer to be launched as early as next week at 480,000 yen per share, valuing the OSE at 130 billion yen ($1.6 billion).
The merged entity will be called the Japan Exchange Group.
Global fund giant Fidelity, the OSE's top shareholder with a stake of about 15 percent, believes the offer price undervalues the OSE's earnings potential relative to the TSE and therefore may not tender its shares, sources with knowledge of the matter said.
The sources were not authorised to speak publicly about the matter. Fidelity declined to comment.
There are some other overseas funds that are also unhappy with the merger terms, the sources said. Because overseas investors collectively own a relatively large 64 percent of the company, they are being closely watched as key to whether the deal can be completed at the current offer price.
Jonathan Foster, who is advising some OSE shareholders on how to deal with the tender offer, said the situation remained difficult to predict.
"I can fully understand why funds may not choose to tender in at 480,000 yen, as I do not think it represents a compelling price to give up a share of the Japan Exchange Group," said Foster, director of special situations at Singapore-based Religare Capital Markets.
The TSE needs to buy half of all shares to complete the tender offer and move to the next stage, where OSE shareholders will vote on whether to approve the merger. That second step will require two-thirds of the vote.
Both exchanges have said they have no plans to alter the deal terms, which value the TSE at roughly 1.7 times the OSE.
Funds are generally not opposed to the logic of the merger, which would combine the TSE's strength in cash equities with the OSE's dominant position in Nikkei index futures and other derivatives, while generating significant cost savings.
Their main concern is about the price and the two-step structure of the deal.
Proxy advisory firm Institutional Shareholder Services recommended a vote against the re-election of OSE President Michio Yoneda ahead of last month's annual shareholders' meeting, arguing he should be held responsible for agreeing to a structure that was unfair to minority shareholders.
ISS said the two-step process posed a "prisoner's dilemma" for shareholders because those who saw merit in the merger and therefore did not tender their stock would effectively be increasing the likelihood of the tender offer failing.
While OSE shareholders re-elected Yoneda, the ISS recommendation did have some impact. Yoneda received 83.5 percent of the shareholder vote, compared with a support rate of more than 98 percent for other directors.
If the TSE is able to complete the tender offer, the two bourses will move to vote on the merger at extraordinary shareholder meetings in the autumn and finalise the combination in January of next year.