Should HKEx investors be excited about the takeover bid for LSE?

September 17, 2019 10:16
HKEx CEO Charles Li (inset) has pushed a deal for the LSE Group, but has been rebuffed by the London bourse. Photo: Reuters

Hong Kong Exchanges and Clearing (HKEx, 00388,HK)) unveiled a surprise US$39 billion takeover bid for the London Stock Exchange (LSE) last week, news that sparked plenty of excitement among mainland netizens as they expect the deal to help the internationalization of the renminbi.

The mega deal would create a global exchange powerhouse and benefit all stakeholders, according to Charles Li, the CEO of HKEx. The two exchanges are believed to highly complementary. For example, the Hong Kong bourse has a stronghold in stocks, derivatives and IPO markets while the LSE excels in fixed income and currency products.

The deal, if it materializes, would also bode well for China, making it easier for Chinese companies to raise capital overseas through the issuance of shares, bonds and other financial products in the global market.

China has been pushing for RMB internalization for years, but the currency is largely limited to internal trade settlement. A marriage between HKEx and LSE would help promote renminbi financial products internationally.

However, the chance of a deal looks slim as of now.

LSE’s board is refusing to engage with HKEx after emphatically rejecting its approach on Friday. The LSE described HKEx’s offer as fundamentally flawed, saying it would not meet its strategic objectives and that it comes with a high risk of being blocked by regulators.

As one of the preconditions for the deal, the Hong Kong bourse has asked LSE to drop its acquisition plan for fintech company Refinitiv.

But LSE said it is committed to the planned acquisition of the data and trading firm Refinitiv from US private-equity firm Blackstone Group and Thomson Reuters Corp for US$27 billion.

LSE has posted a sharp share price rally year to date, and HKEX’s takeover bid offers a premium on top of that. Given this, it wouldn’t be surprising if some LSE investors may be interested in the HKEx offer despite the cool response from LSE.

LSE has a highly-fragmented shareholder structure. The biggest shareholder, Qatar Investment Authority, owns 10.3 percent.

HKEx, whose main shareholder is the Hong Kong government, said its 31.6 billion pounds cash-and-share transaction proposal represented a 22.9 percent premium to the LSE’s closing stock price last Tuesday.

The Hong Kong bourse is embarking on a three-week charm offensive with London Stock Exchange investors in a bid to salvage the proposed takeover offer, Reuters has reported.

However, there are also regulatory hurdles to be cleared.

Germany’s Deutsche Börse Group made a similar offer to take over LSE in March 2016, at a valuation of only 11 billion pounds at that time. Although the deal had been approved by shareholders of both exchanges, it was finally blocked by European Commission on anti-trust grounds.

Coming to HKEx, should its shareholders be excited about the LSE deal?

The answer is, not really, from the valuations perspective. HKEx commands a price-to-earnings multiple of 33, while LSE’s P/E figure would stand at 52. The price being paid by HKEx is definitely hefty.

And the claimed strategic benefits and synergies of the deal look doubtful at best considering the price tag, which will lead to massive cash payment and share dilution.

HKEx paid 1.388 billion pounds to acquire London Metal Exchange in 2012, but it has yet to prove the deal was worthy enough.

This article appeared in the Hong Kong Economic Journal on Sept 12

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist