Shares in the operator of the Hong Kong stock market fell sharply a day after it made a £32bn takeover bid for the London Stock Exchange, in a transaction that is expected to rejected in the face of pushback from investors and regulators.
By early afternoon in Hong Kong, stock in Hong Kong Exchanges and Clearing fell 3.4 per cent, wiping more than $1bn in value from the company.
HKEX stunned investors when it made the unsolicited bid for the LSE, one of London’s highest-profile financial institutions, on Wednesday. The HKEX proposal values LSE shares at £83.61 each, or a 23 per cent premium to their closing price on September 10.
HKEX has said that the deal would combine “the largest and most significant financial centres in Asia and Europe”, but investors expect that it will face significant political hurdles and questioned the structure of the deal.
The LSE is in the process of its own blockbuster deal, as it moves to acquire data and trading group Refinitiv in a $27bn purchase that is awaiting shareholder approval.
The HKEX bid comes amid a deepening political crisis in Hong Kong, where the government — the biggest shareholder in the bourse — is grappling with months of protests that have turned increasingly violent. Millions of pro-democracy protesters have taken to the streets since June, raising questions about the viability of the “one country, two systems” model under which Hong Kong has operated since the handover of the territory from British to Chinese rule in 1997.
“Through the Hong Kong government, Beijing controls the exchange here and lists vasts amounts of state-owned enterprises on it,” said David Webb, a Hong Kong-based activist investor who was an independent director on the HKEX board until 2008.
Mr Webb noted that seven of HKEX’s 13 board members were appointed directly or indirectly by Hong Kong’s government and that its chairman has always been a member of the Hong Kong leader’s executive council, including the current chair, Laura Cha.
“The question in particular, given the current focus on the political structure of and election arrangements in Hong Kong — the lack of democracy — is would the politicians and regulators of the various parts of LSE Group accept that kind of control arrangement,” he said.
Regulatory scrutiny would not be limited to London. LSE owns the Italian stock exchange, which also controls the platform behind the country’s government bonds trade.
“They’re going to think it’s a Chinese takeover,” Richard Harris, founder of Port Shelter Investment Management, said of British regulators. “All of a sudden you’re losing the crown jewel of London to foreign ownership.”
Analysts said HKEX was also facing increased competition from bourses in Shanghai and Shenzhen. Hong Kong’s status as an international finance hub is also under pressure amid increasing worries over interference by China’s ruling Communist party.
“They’re racing against time, if [HKEX] don’t make a bid now, in one or two years’ time it will be very difficult,” said Ronald Wan, founder of Partners Capital, a Hong Kong investment firm.
But analysts also pointed to potential synergies between the two exchanges. Hong Kong and London are both centres for renminbi trading, while the UK capital recently launched a stock trading link with Shanghai.
Analysts at Citi on Wednesday downgraded HKEX’s shares to sell, saying the transaction price was “high” and would be likely to weigh on the Hong Kong company’s stock price.