Breakingviews - HKEX bids $37 bln to halt London rival’s escape

The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017.

LONDON (Reuters Breakingviews) - Hong Kong and London are both financial centres racked by political turmoil. But months of violent protest in the Chinese territory and parliamentary disarray in Britain are no obstacles to Charles Li’s hopes of combining the two cities’ stock exchanges. The chief executive of Hong Kong Exchanges and Clearing on Wednesday unveiled a plan to buy London Stock Exchange Group for $37 billion in cash and shares. It’s a last-ditch attempt to prevent his target from escaping.

The LSE is used to takeover interest: It has on average received a bid every 2.5 years since it listed in 2000, according to Berenberg analysts. The latest proposal has a greater urgency. LSE Chief Executive David Schwimmer turned predator last month, agreeing to buy financial information purveyor Refinitiv for $27 billion. If completed that deal would put the LSE beyond the reach of HKEX, which has a market value of almost $40 billion.

HKEX’s bid therefore depends on LSE shareholders rejecting the Refinitiv takeover. The Hong Kong exchange’s offer of 83.61 pounds per LSE share is enough to make them think twice. That is 23% above LSE’s closing price on Tuesday, and a stonking 47% more than the shares were worth before news of the Refinitiv deal broke in July.

The HKEX’s announced plan has several shortcomings, though. Li offered few details about how the company will justify a valuation of 26 times LSE’s expected EBITDA this year, according to forecasts compiled by Refinitiv. His grand vision of creating a global entity connecting east and west is no substitute for spelling out specific cost savings, or new revenue that the combined group could capture. As three-quarters of the value of HKEX’s offer is in the form of its own shares, the reaction of the company’s own investors will be crucial.

British authorities may also intervene. Li on Wednesday hailed Britain’s openness to foreign ownership, as evidenced by HKEX’s acquisition of the London Metal Exchange in 2012. Prime Minister Boris Johnson might well see the offer as a vote of confidence in Britain. But his opponents are bound to accuse him of letting the bourse fall into the hands of a company which based in a territory that is increasingly under the influence of mainland Chinese authorities. Regulators will also be nervous about anything that unsettles London’s financial infrastructure when rivals in continental Europe are circling.

Finally, the prospect of a takeover might also prompt long-standing suitors like CME Group and Intercontinental Exchange to join the fight. If HKEX is to end LSE’s independence, it still has many hurdles to clear.


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