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Political risks of Hong Kong exchange's US$39 billion LSE approach takes toll on shares

Political risks of Hong Kong exchange's US$39 billion LSE approach takes toll on shares

A man walks out of the Stock Exchange of Hong Kong offices in the Central district of Hong Kong on Sep 11, 2019. (Photo: AFP/Nicolas Asfouri)

HONG KONG: Hong Kong stock exchange shares fell more than 3 per cent on Thursday as investors raised concerns about the political and regulatory risks involved in its US$39 billion approach to take over London Stock Exchange (LSE).

The proposed deal aims to create an exchange powerhouse spanning Asia and Europe which would be better able to compete with US rivals such as Intercontinental Exchange Inc and CME Group inc.

READ: Hong Kong Stock Exchange unveils shock £32 billion bid for London rival

Hong Kong Exchanges and Clearing's (HKEX) indicative offer, made public after the close of the city's markets on Wednesday, also got a cool response in London, where LSE shares finished up 5.9 per cent, far short of the implied premium.

Tough political and technical challenges to the deal have already surfaced and HKEX shares were off 3.3 per cent in Hong Kong, underperforming the blue-chip Hang Seng Index.

HKEX's proposal is conditional on LSE abandoning a US$27 billion acquisition of financial information provider Refinitiv from U.S. private equity firm Blackstone and Thomson Reuters, the parent of Reuters News.

That deal, which went public in late July, caused LSE's shares to leap 15 per cent on hopes Refinitiv's financial data business would boost its long-term profitability. LSE said in a statement on Wednesday that it remained committed to the Refinitiv deal.

HKEX has 28 days to make a firm bid for the LSE, whose shares were down 0.2 per cent at 7,194 pence at 8.09am GMT (4.09pm Singapore time) on Thursday, or walk away for six months.

A source close to the LSE said HKEX executives met with LSE Chief Executive David Schwimmer in London on Monday, just two days before they made the proposal public.

The LSE board will meet within days to decide if it will engage with HKEX and thereby effectively ditch the Refinitiv takeover, the source added.

An LSE spokeswoman had no comment on Thursday.

Analysts said the perception of Beijing's growing influence over Hong Kong could become a key sticking point for an LSE takeover given the government's close links with the HKEX.

Fitch Ratings said that "increasing control by Chinese authorities over Hong Kong" could raise regulatory concerns in Britain and the United States about data and information security.

Hong Kong is entering a fourth month of sometimes violent protests sparked by legislation that would have drawn the former British colony closer to the Chinese legal system.

The government's handling of the protests has been criticised internationally, as has the political pressure applied by Beijing to Hong Kong companies not to support the pro-democracy movement.

Cathay Pacific Airways was ordered to suspend staff who were involved in or supported the demonstrations.

The Hong Kong government holds a 6 per cent stake in the HKEX, approves six of the 13 board members and can also stop any other shareholding rising above 5 per cent.

"The transaction will require various regulatory approvals, which will stress-test the world's understanding of Hong Kong's 'one country, two systems' constitution," said David Blennerhassett, an independent analyst writing on the SmartKarma research platform.

"It will be politically tough now and in the near-term to get this through various regulatory channels," he added.


Analysts said HKEX's share price fall reflected investor concern about the dilutive impact of the cash-and-shares offer, and scepticism the offer would succeed.

"If the market thought the deal was going to go ahead, I would have expected the shares to have fallen by more than 3 per cent, typically that's what we'd expect for an acquirer in a deal like this," said Michael Wu, analyst at Morningstar.

Under the terms of the offer, LSE shareholders would receive 2,045 pence in cash and 2.495 newly issued HKEX shares. HKEX said it intended to apply for a secondary listing of its shares on the LSE if the deal went through.

Citigroup downgraded HKEX to "sell" from "buy", saying the acquisition price was high and could "add downward pressure" to the exchange's shares and valuation. Regulatory hurdles for the deal were also high, it said in its research note.

Analysts however said they could see strategic logic in HKEX's move.

"We believe that bringing the largest listed exchanges in Asia and Europe together could create new revenue streams and a lot depends on how well HKEX can capitalise on this," Daiwa Capital Markets analyst Jonas Kan wrote in a research report.

Source: CNA/ga


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