Serious doubts about Hong Kong’s £32 billion offer for the London Stock Exchange grew on Thursday just one day after the daring bid emerged.
Investors say the deal could fail over price, regulatory and political concerns even in the unlikely event that the LSE’s management backed the offer.
The first opportunity investors in Hong Kong Exchanges and Clearing (HKEX) had to react to the deal saw the shares fall more than 3%, taking $1 billion off the value of the company.
With growing talk in the City that HKEX is in effect controlled by the Chinese, the LSE is widely expected to formally reject the deal.
LSE shares fell again today, off 16p at 7190p, far below the 8361p at which the offer was valued yesterday. That suggests shareholders think it highly unlikely the bid will succeed.
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UBS said in a note to clients: “There are only few instances of cross-continental exchange mergers that have been completed successfully, as nationalist concerns often arise.” The bank would be “surprised to see LSE’s management and board prefer a takeover bid from HKEX” ahead of its own deal to buy Refinitiv, unveiled last month.
Hong Kong needs to make a formal offer within 28 days, or walk away. It does not seem to have had any encouragement from the LSE to proceed.
Former LSE chief executive Xavier Rolet said American watchdogs are likely to raise concerns. He said: “One issue is the LSE clears about 90% of the US domestic market for interest rate swaps and it is co-regulated by the Bank of England and the US Commodity Futures Trading Commission.”
A Government spokesman said: “The London Stock Exchange is a critically important part of the UK financial system, so as you would expect, the Government and the regulators will be looking at the details closely.”
Some City figures say officials would see any Hong Kong deal as a takeover by China. “They are asking LSE shareholders to hold paper in a Hong Kong business,” said one. “The market reaction is fairly clear.”
In theory, the HKEX deal would create a powerhouse to compete with US rivals such as the Intercontinental Exchange (ICE) and CME Group. Either could launch a rival bid for the LSE, though.
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Fitch Ratings said “increasing control by Chinese authorities over Hong Kong” could raise regulatory concerns in Britain and the United States about data and information security.
Under the terms of the offer, LSE shareholders would receive 2045p 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.
Bank of America Merrill Lynch called the bid “not very attractive” citing uncertainty over cost, regulation and synergies. Exane BNP said, “Ultimately we would expect the offer to be rejected” since 75% of it is in shares of HKEX.