By Matthew Lawson, Foreign Legal Adviser and Scott Colvin, Lawyer
News broke overnight on 12 September of a sensational bid by Hong Kong Exchanges & Clearing Ltd — owners of the Hong Kong Stock Exchange (HKSE) — to purchase the London Stock Exchange from its owner, the London Stock Exchange Group PLC (LSE).
The US$36.6 billion bid, which was unsolicited, is extraordinary in the context of the United Kingdom’s impending exit from the European Union (and the uncertainty around the form and substance of that exit), as well as global trade and market insecurity.
Compounding global uncertainty is the more geographically-specific unknown of mainland China’s changeable relationship with Hong Kong. Months of political unrest in the semi-autonomous region have been sparked by what is seen as a trend towards increased mainland determination of Hong Kong affairs.
The continued exertion by mainland China of control over Hong Kong has left some fearing that an acquisition of the LSE by the HKSE may become an acquisition by China, which is still finding its feet as a market for international securities trading.
The LSE’s share price spiked at the announcement of the news, reaching a peak over 16% higher than its pre-announcement price, before settling at a new price level hovering around 6-7% higher than pre-announcement.
Both its apex price and the now-settled trading price are short of the valuation implied by the acquisition, however. At the time of writing, the bid price represents an approximate premium of 25% on top of market valuation. This likely signals a feeling among investors that the deal is unlikely to get through.
The HKSE and LSE are similar-sized, with the former listing entities with combined total market caps of US$3.82 trillion and US$3.64 trillion, respectively.
Regulators will also have their say before any deal is inked. Over the past 20 years, seven merger bids involving the LSE have failed.
The UK government is likely to block any potential deal, sources have already revealed, as they consider the LSE too central to the country’s financial infrastructure to be sold offshore.
In 2017, regulators in the European Union blocked the merger of the LSE and its German counterparts at the Deutsche Boerse. Of course, should the UK leave the European Union, this regulatory concern may fall away somewhat.
The LSE is currently undertaking a US$27 billion takeover of financial data firm Refinitiv, looking to bolster its offering in that adjacent space. As a precondition to a successful purchase of the LSE by the HKSE, the LSE would be required to abandon its acquisition of Refinitiv.
The proposed acquisition of Refinitiv by the LSE would increase its ability to compete with the global market heavyweights, such as Intercontinental Exchange and CME Group. That deal, which remains subject to shareholder and regulatory approval, would allow the LSE to rival companies like Bloomberg in its provision of market data to clients.
However, the HKSE hopes that its proposed acquisition of the LSE would create an even greater market behemoth.
A combination of the LSE and HKSE would facilitate the capitalisation of entities in Asia and Europe by creating a seamless global market for the trading of stocks, derivatives and commodities.
Perhaps most importantly, it would allow the LSE to facilitate trading in mainland China securities, providing its clients with opportunities in a growing trading market.
No matter the near-term outcome for the LSE, our view remains that the future remains bright for our clients looking to find liquidity across jurisdictional boundaries. The rise of international securities trading looks to continue with greater international collaboration and data-driven insight.
For advice on tapping into international markets and making the most of a world of possibility, Mills Oakley has experts on hand to assist as you broaden the horizons of capital available to your business.
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