Bankers’ $100 Million Dilemma Solved as HKEX Scraps LSE Deal

(Bloomberg) -- Bankers had a tough time in recent weeks trying to decide whether to support Hong Kong Exchanges & Clearing Ltd.’s bid for its London counterpart. In the end, before many of them made up their minds, the deal fell apart.

HKEX said on Tuesday it won’t proceed with its 29.6 billion-pound ($36.4 billion) unsolicited takeover bid for London Stock Exchange Group Plc. While HKEX’s board continues to see a combination as “strategically compelling,” it’s “disappointed that it has been unable to engage with the management of LSEG in realizing this vision,” the exchange said.

A successful deal would have marked the biggest transaction out of Asia during a slow year for M&A, something that would normally send banks flocking to the buyer’s side to try and get a slice of the action. But in this case, the long-term risks of supporting an unsolicited offer could have proved higher.

HKEX had been discussing borrowing between 7 billion pounds and 8 billion pounds to back its proposed takeover, Bloomberg News reported last month. Lenders considering whether to join the financing have been weighing the likelihood that the deal will turn hostile after London Stock Exchange Group Plc’s initial rejection, people with knowledge of the matter said.

Finding funding for a successful takeover would have relied on explaining the sound foundation of the deal to both shareholders and regulators, according to Randy Kroszner, a professor at The University of Chicago Booth School of Business.

“In very high profile deals where there is often politics involved, like exchanges, banks must get the balance right,“ said Kroszner, who is also deputy dean for Chicago Booth’s executive programs. “They must be sure to provide the best advice they can, and offer a sound basis in terms of pricing and deal structure to ensure a reasonable outcome.”

Banks typically prefer to work on friendly, agreed deals as hostile transactions can end up hurting long-term relationships with prospective clients. Some banks that had spoken to HKEX were concerned that joining the funding may have jeopardized future work for Blackstone Group Inc., one of Wall Street’s biggest fee payers, according to the people.

That’s in addition to any potential damage they were considering to their relationship with LSE, the people said, asking not to be identified because the information is private. HKEX’s bid was conditional on LSE dropping its own $27 billion acquisition of Blackstone-backed data provider Refinitiv.

Potential Fees

At stake was up to $100 million in fees that banks could have earned from the Hong Kong bourse operator, according to New York-based consulting firm Freeman & Co. HKEX could have paid out fees of as much as 0.5% of the financing package’s value to banks providing initial funding for the deal, in addition to roughly $30 million to $50 million in M&A advisory fees, Freeman estimates.

A representative for HKEX declined to comment on the challenges of the financing when Bloomberg News reached out on Monday.

A successful takeover would have turned into one of the biggest global deals of the year and help lift volumes in Asia and Europe. Announced mergers and acquisitions involving Asian companies are down 23% this year to $735.4 billion, while deal volumes are down 20% in Europe to $822.5 billion, data compiled by Bloomberg show.

HKEX has been advised on the bid by Moelis & Co. It later added UBS Group AG and HSBC Holdings Plc to its stable of advisers and used Credit Suisse Group AG to arrange some meetings with LSE investors, people with knowledge of the matter said last month. Goldman Sachs Group Inc., Morgan Stanley and Robey Warshaw have been lead advisers to LSE, which has also been working with Barclays Plc and corporate broker Royal Bank of Canada.

--With assistance from Jan-Henrik Förster.

To contact the reporter on this story: Manuel Baigorri in Hong Kong at mbaigorri@bloomberg.net

To contact the editors responsible for this story: Fion Li at fli59@bloomberg.net, Ben Scent, Ville Heiskanen

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