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Hong Kong Stock Exchange Offers to Buy Its London Counterpart Hong Kong Stock Exchange Offers to Buy Its London Counterpart
(about 2 hours later)
Hong Kong’s stock exchange operator said on Wednesday that it was offering to purchase the parent company of the London Stock Exchange in a deal that, if completed, would value the British company at nearly $37 billion. HONG KONG The owner of the Hong Kong Stock Exchange said on Wednesday that it had offered $36.6 billion to buy the London Stock Exchange, making a bid to create a global trading giant that would combine a European institution with fast-growing Asian economies.
Hong Kong Exchanges and Clearing Limited said in a news release that a combination with the London Stock Exchange Group would result in a financial markets company “connecting the established financial markets in the West with the emerging financial markets in the East, particularly in China.” It also said that combining trading platforms would reduce costs. A deal is far from assured, however. It depends on the London exchange abandoning its own deal, struck just weeks ago, to buy a data company called Refinitiv. On Wednesday, the London exchange said that it would consider the unsolicited offer from Hong Kong but that it remained committed to completing the deal for Refinitiv.
Shares of the London Stock Exchange Group jumped more than 14 percent in early trading on Wednesday. The Hong Kong proposal could face other hurdles as well. British officials, like their counterparts around the world, have put greater scrutiny on deals involving China, of which Hong Kong is a semiautonomous region. Antigovernment demonstrations in Hong Kong this summer have highlighted shifts in the city’s unusual relationship with Beijing and called into question the long-term viability of its reputation for an independent judiciary and as a hub for global business.
In a statement, the London Stock Exchange said its board would consider the offer, which it called “an unsolicited, preliminary and highly conditional proposal.” Reflecting the uncertainty, the London exchange’s shares surged after the deal was announced before falling below the Hong Kong exchange’s offer price, suggesting that many investors believed a deal would not be completed.
The London exchange also said it would stick with its deal to acquire Refinitiv, a provider of financial data, which it struck just weeks ago in a major bet on the value of financial information to investors. Hong Kong Exchanges said its offer was conditioned on the Refinitiv deal being terminated. Executives at Hong Kong Exchanges and Clearing Limited, the company that owns the Hong Kong exchange, dismissed the concerns. Key managers would continue to run the London Stock Exchange, they said, and the offer itself represented an endorsement of London’s future as a global financial hub.
Both companies have global ambitions. Two years ago, European antitrust regulators blocked the London exchange from merging with the Deutsche Börse Group, which would have created a major market operator across Europe. It also tried to combine with the Toronto Stock Exchange nearly a decade ago. They also dismissed concerns that regulators would look skeptically at a deal from a Hong Kong company, citing their company’s successful 2012 purchase of the London Metal Exchange.
For its part, the Hong Kong exchange operator struck a deal in 2012 to buy the London Metal Exchange, a major forum for trading nickel, aluminum and other industrial building blocks. But its big ties are with China, given Hong Kong’s longstanding status as a base for global companies doing business in the mainland. In recent years it has struck deals with Beijing to open conduits for money to flow between the Hong Kong exchange and exchanges in Shanghai and the Chinese city of Shenzhen, despite China’s tight limits on financial transfers across its borders. “We are not a Chinese company, and we are not even a simple Hong Kong company,” Charles Li, chief executive of Hong Kong Exchanges, said in a conference call with reporters. “We are a global company.”
Though the Hong Kong exchange’s revenue and profitability has continued to grow, it faces challenges on a number of fronts. The trade war between the United States and China has contributed to a slowdown in trading. Both the Hong Kong and the London exchanges have sought merger partners to deal with a rapidly shifting world for the trading of stocks, bonds and other securities. The rise of new electronic trading platforms and methods have forced them to cross borders to better appeal to companies that no longer necessarily see one country as their home.
Longer term, the Hong Kong exchange and other companies in the Asian financial capital face difficult questions about their future. Stock exchange executives have been trying to persuade foreign companies to pick overseas exchanges as their primary markets. American executives regularly travel to Asia to try to persuade fast-growing private companies to list their shares in the United States, rather than Hong Kong or Tokyo.
Hong Kong is a semiautonomous part of China but operates under its own laws, which international businesses and investors find attractive compared with China, where the courts are undependable and controlled by Beijing. But antigovernment protests fueled in part by Beijing’s more assertive hand in Hong Kong’s affairs have raised questions about how long that arrangement can last. On Friday Fitch Ratings, the credit rating firm, downgraded its outlook on Hong Kong, saying the unrest had tested that arrangement. Stock exchanges have been transformed as a result. In the United States, both the New York Stock Exchange and the Nasdaq Stock Market are now part of broader, more global companies.
Hong Kong Exchanges said its offer included both cash and stock valued than one-fifth higher than the London Stock Exchange’s trading value as of Tuesday. The London exchange has tried to do the same. Two years ago, European antitrust regulators blocked it from merging with Deutsche Börse Group, a deal which would have created a major market operator across Europe. It also tried to combine with the Toronto Stock Exchange nearly a decade ago.
The offer follows a wave of mergers among big stock exchange operators over more than a decade, as they seek to build up more sophisticated trading platforms to compete with the rise of electronic exchanges. Its appetite for a deal with the Hong Kong exchange is not clear, however. The Refinitiv proposal represented the London exchange’s own major bet on how to navigate shifting financial markets. Market data has emerged as a potential area of growth. The deal with Refinitiv would be a $27 billion transaction, including debt, and could make the exchange too big and difficult for a suitor like the Hong Kong exchange to buy.
Mr. Li and other Hong Kong exchange executives said the Refinitiv deal had galvanized them to act. “We know we were late,” Mr. Li said, “and we don’t want to be late again.”
The Hong Kong exchange is making its offer at a turbulent time. It has long prospered from Hong Kong’s traditional status as a gateway between mainland China and the rest of the world. Many big state-run Chinese companies have listed there, and global investors have flocked to Hong Kong to buy shares of fast-growing Chinese companies like Tencent, the powerful internet conglomerate.
Those ties have begun to be a burden, however. The trade war between the United States and China has contributed to a slowdown in trading on Hong Kong’s exchange.
In the longer term, the exchange and other Hong Kong companies face difficult questions about their future.
Hong Kong is Chinese territory but operates under its own laws, which international businesses and investors find attractive compared with conditions on the mainland, where the courts are undependable and controlled by Beijing. But the recent mass protests, fueled in part by a more assertive hand from Beijing in Hong Kong affairs, have raised questions about how long that arrangement can last. On Friday, Fitch Ratings, the credit rating firm, downgraded its outlook on Hong Kong, saying the unrest had tested the city’s capacity to remain distinct.
On Wednesday, Mr. Li rejected the idea that the Hong Kong exchange would want to loosen its ties to the mainland. He noted London’s ambition to become a global center for trading in the renminbi, the Chinese currency, and said the Hong Kong exchange could help fulfill that. Beijing heavily restricts the currency from crossing its borders, but some Chinese officials have openly discussed a day when the world might use the renminbi as commonly as they use the American dollar, which would give China greater say in the global financial system. Should London become a hub for renminbi use, more Chinese companies and investors would consider the city an even more attractive place to do business.
The Hong Kong exchange’s offer also represents a ringing endorsement of London’s future despite the uncertainty stirred up by Britain’s effort to leave the European Union, which has left many questioning the city’s prospects as a financial hub.
“We see no reason why any of the temporary difficulties and challenges that everybody is going through should be the obstacle for some great things to happen,” Mr. Li said.
Under the Hong Kong exchange’s offer, shareholders of the London exchange would receive a mix of cash and stock that would value the company at $36.6 billion, roughly 20 percent more than the shares were valued at earlier this week.
The Hong Kong exchange said most benefits of the merger would come from fusing technology. The Hong Kong exchange has been looking to bolster its trading systems. In return, the combined company could offer companies and investors a broad, common platform for trading that would be open 18 hours a day.