London investors sent a message to Hong Kong Exchanges & Clearing on Wednesday: “Pull the other one – it’s got bells on”. That old British expression of disbelief was apparent in the feeble 5 per cent jump in the London Stock Exchange’s shares. HKEX hopes to buy LSE for an enterprise value of £31.6bn. If this was likely to succeed, shares should have jumped by the 23 per cent premium offered.
The world’s great bourses are national institutions, or at least civic ones. Takeovers and mergers typically fail for this reason. The bosses of exchange groups – whose real businesses these days are data, clearing and derivatives – should not fool themselves otherwise. Thanks to Brexit, the UK government is in chaos. Even so, it cannot meekly nod this takeover through.
HKEX is both too close to China and too divorced from it. As a big business based in a troubled autonomous territory, HKEX is more exposed to the hostility of the Chinese government than to its lucrative favour. The US may object to the deal on security grounds, even if the UK does not.
The attractions for HKEX boss Charles Li are clear. The takeover would create a new conduit for east and west to exchange capital, information and securities. It would dilute Chinese political risks borne by his business. Returns would surely beat those achieved by HKEX on its overpriced £1.4bn acquisition of the London Metal Exchange in 2012.
HKEX is offering £83.6 per share, a steep 26 times forward multiple of enterprise value to ebitda. But that is more affordable than it looks. First, sterling is weak. Second, HKEX could save hefty costs. Cash intended to cover an overhaul of creaky trading systems would instead help pay for a target with superior IT.
But cash constitutes less than quarter of the price. The rest is in HKEX’s volatile stock. This has been buoyed by fees from a slew of big floats that civil unrest imperils. Meanwhile, LSE shares have surged in response to its $27bn agreed bid for data and trading group Refinitiv. HKEX would only bid for LSE if this popular deal was dropped.
Sadly, Hong Kong unrest means HKEX looks more like a refugee than a gatekeeper to fast-growing Asia. As things stand, its bid approach for LSE is uncompelling.