A blockbuster plan to merge the London Stock Exchange with its Hong Kong counterpart faces an uphill battle after being met with scepticism from politicians and investors alike today.
Read more: Hong Kong bourse proposes merger with LSE
Hong Kong Exchanges and Clearing (HKEX) shocked the City this morning after revealing a surprise £32bn bid to buy the LSE, threatening to torpedo the UK group’s own takeover plans to snap up US data provider Refinitiv.
LSE’s share price soared to a record high immediately after the proposals were announced but soon lost most of its gains as shareholders reacted to the unprecedented move aimed at “bringing together the largest and most significant financial centres in Asia and Europe”.
Amid widespread anti-government protests in Hong Kong and worries over civil rights in China, several leading politicians expressed concern over the deal.
Tom Tugendhat, chair of the influential foreign affairs committee, told City A.M.: “Our markets are based on the rule of law. China’s actions in Hong Kong in recent years raise concerns over the city’s autonomy, and the connection to a vital national asset like the London Stock Exchange isn’t wise.”
A top 10 shareholder said: “The share price reaction one hour after the approach says the market does not believe it will be successful,” adding that there will now be pressure on US rivals such as ICE (Intercontinental exchange) to throw their hat in the ring for a bid too.
One City figure involved in the LSE’s failed merger talks with Deutsche Boerse in 2017 said: “HKEX has wanted to buy LSE for years and clearly the Refinitiv deal has made them feel forced to move now…but now is not a great time for them.
“ICE and CME will be watching this very very closely indeed. The Americans will not be comfortable with the prospect of the LSE being owned by HKEX, especially when the majority of LSE customers are big US investment banks.”
Treasury Select Committee member Wes Streeting also said he would “want reassurance about where the leadership will be based and, given LSE’s ownership of Russell Indexes, what level of risk might present itself as a result of the ongoing US-China trade wars.”
Reacting to news of the deal live on Bloomberg TV, business secretary Andrea Leadsom said she would look “very carefully at anything that had security implications for the UK”.
Controversy around foreign acquisitions in the UK has mounted in recent years, with the government bolstering its Takeover Code in 2018 following a string of contentious M&A deals.
Financial analysts in the City also flagged political tensions as a major issue, with UBS saying that business disruptions in Hong Kong adds to the potential perceived risk of a proposed LSE/HKEX merger.
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Protesters and police have been clashing in violent demonstrations throughout Hong Kong over the summer following anger at a now-suspended controversial bill that would have allowed extradition to mainland China.
HKEX boss Charles Li was adamant that concerns over political influence from a takeover were misplaced, saying on a media call: “To everyone telling us this is a potential Chinese takeover, over the last seven years of ownership of the London Metal Exchange (LME) we have invested heavily, created many jobs, paid a lot of taxes… and it is is still a quintessential British institution.”
Li added: “Together, we will connect East and West, be more diversified and we will be able to offer customers greater innovation, risk management and trading opportunities.”
HKEX said the deal is subject to LSE’s mammoth £22bn merger with Refinitiv, set up to rival Bloomberg, falling through.
In a statement the LSE, which is headed up by former Goldman Sachs banker David Schwimmer, said the HKEX offer was “preliminary and highly conditional”, but would consider it and make a further announcement.
The proposed transaction implies a value for each LSE share of around 8,361p, representing a premium of 23 per cent to the closing share price of 6,804p on 10 September.
The move comes just two years after EU regulators blocked a proposed £21bn merger between the LSE and Germany’s Deutsche Boerse.
Iain Anderson, boss of City lobby firm Cicero, said: “This will have a very significant level of scrutiny, and the China element – with the level of unrest – will give it even more political scrutiny over the regulatory scrutiny.”
He added: “But that said, because our politicians are so stuck on Brexit that with any deal like this, they are more inclined to let regulators do the heavy lifting.”