Bid for London Stock Exchange Faces Hurdles, May Spark a Bidding War

(Bloomberg) --

Hong Kong Exchanges and Clearing Ltd.’s $36.6 billion takeover bid for London Stock Exchange Group Plc faces serious political hurdles, and could lead to a competing offer from a rival, such as Intercontinental Exchange Inc. or CME Group Inc., according to market participants.

The offer seeks to drive a wedge between LSE’s planned combination with data provider Refinitiv, which was well-liked by investors. The U.K. exchange said it will consider the unsolicited proposal and remains committed to Refinitiv.

An initial 16% jump in LSE shares on Wednesday pared to about 5% in the early afternoon as investors considered the likelihood and ramifications of any Hong Kong deal, including the political and national security concerns of partial Chinese state ownership. The stock is up 77% this year.

Here’s what investors and analysts had say about the bid:

Guy de Blonay, fund manager, Jupiter; LSE shareholder

• “The crucial element of the deal is whether it is indeed contingent on the London Stock Exchange’s deal with Refinitiv being taken off the table.”
  • “If this is the case, it looks uncertain whether shareholders will accept the offer, given that the Refinitiv deal is popular across the shareholder base.”
• “If the offer is rejected on this basis, it may open the door to further bidders which could lead to a bidding war situation.”
• “Ultimately, it’s a highly conditional deal with a tortuous antitrust process which brings with it a lot of uncertainty.”

Neil Wilson, chief market analyst, Markets.com

• “This looks like a last-ditch throw of the dice: it’s last orders for LSE bids as it works on its deal to absorb Refinitiv,” after which it’s probably going to become too large for rivals like HKEX to swallow.
• “The question now is whether this approach forces others to join the party and spark a bidding war.”
• “Not everyone is so warm to the Refinitiv deal as the stock price adjustment suggests -- a better premium from say a (U.S.) rival could look appealing to shareholders.”

Ben Kelly, analyst, Louis Capital

• At first glance the approach appears opportunistic based on pound weakness, but not so much when you look at LSE’s EV/Ebitda multiple, already at historically high levels.
• Doesn’t expect the deal to be consummated, given issues including likely political opposition to a U.K. exchange being taken over by a Hong Kong company that is 6% owned by the state, and notes that the U.S. could also object.
• Offer is also likely to fail as it is not high enough, as U.K. holders will not want Hong Kong-listed shares, and because it is also conditional on the Refinitiv transaction being terminated.

Chris Turner, analyst, Berenberg

• While LSE has been a frequent bid target since listing in 2000, this particular bid is surprising, given the lack of operational overlap between the two groups.
• Political risks are “the main obstacle,” as the potential acquisition “would see a Chinese company acquire the primary equity markets of both the U.K. and Italy, as well as key infrastructure for European debt markets.”
• Expects LSE to continue to pursue “the near-term earnings-accretion and long-term strategic logic of the deal with Refinitiv.”

Alberto Tocchio, chief investment officer, Colombo Wealth

• “Not too surprised” about the news as “China is still an unexplored market for foreigners and the recent news flow was working in that direction.”
• “China’s market is opening up at a very fast pace. In this specific case however, the deal could even be called off as political issues and national security concerns might arise. It will not be an easy process.”

Andrew Sullivan, director, Pearl Bridge Partners

• “HKEX buying the London Stock Exchange makes sense because it already has a tie-up with the London Metal Exchange.”
• “It’s also opportune on the basis of a weak pound. The proposed combination would make sense for London, which wants to remain a yuan hub.”

Manish Singh, chief investment officer, Crossbridge Capital

• “It will take decades if not years for any country in Asia to build an exchange of the calibre and importance as LSE.”
  • “The easy way for China/HK/Asia is to buy an equity stake or indeed full ownership as China is trying and use LSE for listings of Asian equities.”
• “The trust between China and the U.S. is not going to grow” and the U.K. may benefit from this.

Sharnie Wong, analyst, Bloomberg Intelligence

• HKEX’s bid faces “significant regulatory risks.”
  • Notes that Deutsche Boerse’s failed merger with LSE was dogged by political issues and SGX’s 2011 bid for ASX was rejected by Australian regulators on national interest concerns.
• The deal, if it proceeds, would create the largest exchange globally and capture revenue opportunities as China accelerates the opening of its capital markets to international participants.

--With assistance from Paul Jarvis.

To contact the reporters on this story: William Canny in Amsterdam at wcanny3@bloomberg.net;Lisa Pham in London at lpham14@bloomberg.net;Katrien Van Hoof in London at kvanhoof@bloomberg.net;Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Kasper Viita

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