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H.K. bourse proposes $39 bil. merger with LSE

Reuters file photo

A panel outside the Hong Kong Exchanges displays top active securities during morning trading in Hong Kong in October.

ReutersHONG KONG (Reuters) — Hong Kong Exchanges and Clearing Ltd. (HKEX) unveiled a $39 billion takeover approach to the London Stock Exchange PLC (LSE) on Wednesday that received a cool response from investors concerned about its regulatory and financial hurdles.

To prevail, HKEX would have to persuade British politicians and European regulators to abandon their deep-rooted skepticism over mergers of financial exchanges.

It would also have to woo LSE shareholders who are in favor of maintaining their ownership following LSE’s $27 billion deal last month to acquire financial data provider Refinitiv. In an ominous sign for the deal’s prospects, LSE shares ended trading on Wednesday at a deep discount to HKEX’s offer price.

With its bid, HKEX is betting that a major international acquisition will help it overcome uncertainty at home. Hong Kong’s pro-democracy protests in the last few weeks over China’s political influence have raised questions among major companies and investors about the appeal of the Hong Kong bourse.

HKEX is also seeking to capitalize on the weakness of the British pound, which has been hit by Britain’s inability to settle on a deal to leave the European Union. The weaker pound has made British companies cheaper for foreign acquirers.

The proposed deal is aimed at creating a combined group better able to compete with U.S. rivals such as Intercontinental Exchange Inc. and CME Group Inc. It is contingent on LSE abandoning the deal to acquire Refinitiv.

“The board of HKEX believes a proposed combination with LSE represents a highly compelling strategic opportunity to create a global market infrastructure leader,” the Hong Kong exchange said in a statement.

The LSE said it would review HKEX’s proposal. In a sign of its cool reception to HKEX’s bid, it added that it was committed to, and continued to, make good progress on its planned acquisition of Refinitiv from U.S. private equity firm Blackstone Group Inc. and Thomson Reuters Corp. Thomson Reuters is the parent of Reuters News.

Spokespeople for Refinitiv, Blackstone and Thomson Reuters declined to comment.

Under the terms of the offer, LSE shareholders would receive 2,045 pence in cash and 2.495 newly issued HKEX shares. HKEX said it intended to apply for a secondary listing of its shares on the LSE once the deal has gone through.

HKEX, whose main shareholder is the Hong Kong government, said its £31.6 billion cash-and-share transaction proposal represented a 22.9 percent premium to the LSE’s closing stock price on Tuesday of 8,361 pence.

The U.K. Treasury described the LSE as a “critically important part” of the British financial system. “As you would expect, the government and the regulators will be looking at the [proposed deal] details closely,” a spokesman said.

“It looks uncertain whether shareholders will accept the offer, given that the Refinitiv deal is popular across the shareholder base for its potential to transform the business and add value over the long-term,” said Guy de Blonay, a fund manager at Jupiter, a top-25 investor in the LSE.

A Hong Kong company acquiring one of Britain’s marquee financial institutions — which also owns the Milan exchange and is a major clearing house in the United States — would be a challenging feat for HKEX.

Germany’s Deutsche Boerse has failed three times in recent years to acquire LSE, hitting opposition from politicians and regulators.Speech

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