HONG KONG - The Hong Kong Stock Exchange wants to take over the London Stock Exchange, and has made a surprise bid to do just that.
Hong Kong Exchanges and Clearing on Wednesday announced a bid to merge the two companies in a cash and share deal worth pound29.6 billion, or pound31.6 billion including debt.
If it eventuates, the combined entity would become the third biggest stock exchange in the world, after the New York Stock Exchange and the Nasdaq.
How it will be viewed with Brexit looming remains to be seen.
"Hong Kong Exchanges and Clearing Limited ("HKEX") today announces that it has made a proposal to the Board of London Stock Exchange Group plc ("LSEG") to combine the two companies. The Board of HKEX believes a proposed combination with LSEG (the "Proposed Transaction") represents a highly compelling strategic opportunity to create a global market infrastructure leader," the Hong Kong stock exchange statement said.
London and Hong Kong are two of the world's premier market infrastructure businesses, which together would offer unique potential to enhance and capture global capital and data flows. The proposed combination would strengthen both businesses, better position them to innovate across markets and geographies, and offer market participants and investors unprecedented global market connectivity, said HKEX. The Proposed Transaction would:
- Create a world-leading market infrastructure group with a global footprint, diversified across asset class, ideally positioned to benefit from the evolving global macroeconomic landscape, connecting the established financial markets in the West with the emerging financial markets in the East, particularly in China;
- Elevate the UK's role in capturing the significant growth opportunities presented by Mainland China's continuing internationalisation and the emergence of RMB as a global reserve currency, securing London's position as the global centre for both Eurodollar and offshore RMB;
- Reinforce Hong Kong's position as the key connection between Mainland China, Asia and the rest of the world, providing a trusted and clear path for the continued opening up of Mainland China's capital markets and for the investment of Asia's growing wealth;
- Enable the creation of unique and valuable data sets for global investors, through the combination of LSEG's global data and analytics capabilities and distribution channels, and HKEX's access to China, the world's most digitalised growth economy;
- Enhance global capital formation by making it easier for companies to access equity capital across the world, through the IPO and secondary fundraising markets in London, Hong Kong, Milan, and Mainland China via the Connect programmes; and
- Offer innovation opportunities in equities, fixed income, currencies, commodities and derivatives products with domestic, regional and global relevance; allow for the application of best-in-class technologies in multiple markets and platforms; and help strengthen transparency, resiliency and risk capabilities in both London and Hong Kong.
HKEX said it believes that the Proposed Transaction would offer the prospect of significant synergies. In particular, the migration of HKEX's trading and clearing platforms to LSEG's technology, the revenue uplift in key businesses from cross-selling and innovation opportunities and a reduction in HKEX's capital expenditures in connection with existing systems and future investment plans all present strong synergy opportunities. LSEG shareholders would benefit from the realisation of the synergies as future shareholders of the combined group.
HKEX says it has played a key role in underpinning the City of London's position as the pre-eminent global centre for metals trading and more widely since acquiring The London Metal Exchange in 2012. It is expected that key LSEG management would continue to operate LSEG businesses and to participate in HKEX Group management following the Proposed Transaction; and, working with the relevant authorities, it is expected that key LSEG businesses would continue to be regulated by their existing primary regulators. As regards the future governance structure of the combined entity, HKEX has begun conversations with certain regulators in the UK and Hong Kong and looks forward to discussing the transaction in detail with LSEG and all relevant regulatory bodies. HKEX will have regard to UK corporate governance best practices, appropriate for a leading global market infrastructure group. In addition, HKEX is fully committed to supporting and building the long-term roles of both London and Hong Kong as global financial centres.
"We believe a combination of HKEX and LSEG represents a highly compelling strategic opportunity to create a global market infrastructure group, bringing together the largest and most significant financial centres in Asia and Europe. Following early engagement with LSEG, we look forward to working in detail with the LSEG Board to demonstrate that this transaction is in the best interests of all stakeholders, investors and both businesses," Laura Cha, Chairman of the Hiong Kong Stock Exchange said Wednesday.
Charles Li, the Chief Executive added: "Bringing HKEX and LSEG together will redefine global capital markets for decades to come. Both businesses have great brands, financial strength and proven growth track records. Together, we will connect East and West, be more diversified and we will be able to offer customers greater innovation, risk management and trading opportunities. A combined group will be strongly placed to benefit from the dynamic and evolving macroeconomic landscape, whilst enhancing the long-term resilience and relevance of London and Hong Kong as global financial centres."
Under the terms of the Proposed Transaction submitted to the Board of LSEG, LSEG shareholders would receive per LSEG share:
2,045 pence in cash and 2.495 newly issued HKEX shares
The Proposed Transaction implies a value for each LSEG share of c. 8,361 pence (based on the closing price of HK$245.20 per HKEX share on 10 September 2019 and a pound:HK$ exchange rate of pound1=HK$9.6865). This would imply a value for the entire issued and to be issued ordinary share capital of LSEG (on the assumption that the listed share capital comprises 354,471,415 shares, post employee option exercise) of approximately pound29.6 billion, implying an enterprise value of pound31.6 billion (inclusive of net debt and other adjustments of approximately pound2.0 billion as at 30 June 2019)1. This represents:
- a premium of 22.9% to the closing share price of 6,804 pence per LSEG share on 10 September 2019;
- a premium of 22.4% to the volume weighted average closing price of 6,833 pence per LSEG share since 29 July 2019, the first trading date after the first announcement of the Refinitiv transaction, to 10 September 2019;
- a premium of 47.4% to the closing price of 5,672 pence per LSEG share on 26 July 2019, the last trading date before the first announcement of the Refinitiv transaction; and
- a multiple of 30.2x times 2018 reported earnings before interest, tax, depreciation, amortisation and impairments2.
HKEX says it intends to apply for a secondary listing of HKEX shares on the London Stock Exchange with effect from completion of the Proposed Transaction, reflecting HKEX's commitment to the UK.
HKEX said it reserves the right to change the terms of the Proposed Transaction and vary the form and/or mix of the consideration in the future as explained below.
The Proposed Transaction would be financed through a combination of existing HKEX cash resources and new credit facilities.
The Board of HKEX said it is confident that the Proposed Transaction would be highly compelling for LSEG shareholders, as well as for HKEX shareholders. HKEX said it intends to continue its dividend policy of paying regular dividends with a normal target pay-out ratio of 90% of the profits of the combined group.