Hong Kong Stock Exchanges & Clearing Ltd.’s tilt at London Stock Exchange Group Plc has achieved one thing: It has extracted a helpful checklist of requirements for any other would-be buyer of the venerable U.K. exchange. Hong Kong will struggle to address all of the concerns London set out on Friday – but it’s too early to say for certain it will fail. It could always throw money at the problem.
The LSE has firmly rejected Hong Kong’s proposal even as a basis for discussion. It notes regulatory approval for a deal is highly uncertain and there would probably be scant clarity in the next few months. To pursue a deal that might never materialize, LSE would have to ditch its planned takeover of data provider Refinitiv (which competes with Bloomberg LP, the parent of Bloomberg News). As things stand, the bird in the bush is worth less than the bird in the hand.
LSE also questions the fundamental strategic selling point of the Hong Kong tie-up – that it provides a conduit for Chinese deposits to enter the global capital markets. It would rather tap that opportunity directly, citing its own recent tie-up with the Shanghai Stock Exchange. Merging with HKEX would be to double down in conventional share trading and there are other ways to access China.
How the combined business would be controlled – in particular the government of Hong Kong’s right to appoint the chairman and approve five directors – is unacceptable in London.
Some, but not all, of these non-financial issues can be addressed. Regulatory uncertainty is somewhat circular: it would diminish if the LSE was onside and working in partnership for clearance. In theory, Hong Kong could reform its board to make its oversight independent of government. But in practice?
As for the strategy, HKEX is what it is. The future status of Hong Kong as a financial center is hard to predict amid the recent unrest.
To the extent Hong Kong is unable to resolve all these concerns directly, it still has the option of offering a stupidly high price in mitigation. That would put incredible pressure to on the LSE to enter talks.
So far, HKEX hasn’t done that. Its part-cash, part-stock offer is worth about 82 pounds ($102) a LSE share based on the most recent closing price. That is less than what the LSE thinks it will be worth after buying Refinitiv. The U.K. bourse won’t put a number on itself, but analysts at Berenberg reckon that the combination would be worth 83 pounds a share.
Hong Kong could certainly afford to add more cash to its proposal. But it needs to keep combined leverage modest, and certainly lower than what the LSE would have after buying Refinitiv. Given the systemic importance of the exchange, it will be easier to get regulatory approval if it is clear the combined company’s balance sheet is strong.
Many LSE holders will discount the value of Hong Kong-listed shares, which they may not be able to own. Perhaps Hong Kong can get round this by simply chucking in even more stock or by raising cash locally through a share sale.
Price can overcome a lot – but not everything. The politics of this situation are highly charged, and they will probably settle the matter.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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