Hong Kong exchange shares slide as $39bn bid impact worries investors

Analysts say getting regulatory approval for the deal will be a challenge

The trading hall of Hong Kong Exchanges & Clearing, which launched a $39bn takeover bid for the LSE. EPA

Shares in the Hong Kong stock exchange fell more than 3 per cent on Thursday as investors cast doubt on the merits of its $39 billion (Dh143bn) takeover approach to London Stock Exchange (LSE), a deal that would create a global financial giant.

The approach, made public after the city's markets closed on Wednesday, received a cool response in London, where LSE shares finished up 5.9 per cent - far short of the premium implied by the indicative offer from Hong Kong Exchanges and Clearing Ltd (HKEX).

HKEX shares dropped 3.3 per cent in afternoon trading in Hong Kong, under-performing the blue-chip Hang Seng Index, which slipped 0.3 per cent.

The proposed deal aims to create an exchange powerhouse spanning Asia and Europe which would be better able to compete with US rivals such as Intercontinental Exchange and CME Group.

But tough political and technical challenges have already emerged.

The HKEX proposal is conditional on LSE abandoning a $27bn acquisition of financial information provider Refinitiv from US private equity firm Blackstone Group and Thomson Reuters. Thomson Reuters is the parent of Reuters News.

That deal, which went public in late July, caused LSE's shares to leap 15 per cent on hopes Refinitiv's financial data business would boost LSE's long-term profitability. LSE said in a statement on Wednesday that it remained committed to the Refinitiv deal.

The approach by the HKEX also comes as pro-democracy protests continue in Hong Kong. The government holds a 6 per cent stake in the HKEX, approves six of the 13 board members and can also stop any other shareholding rising above 5 per cent.

"The transaction will require various regulatory approvals, which will stress-test the world's understanding of Hong Kong's 'one country, two systems' constitution," said David Blennerhassett, an independent analyst writing on the SmartKarma research platform.

"It will be politically tough now and in the near-term to get this through various regulatory channels," he added.

Analysts said HKEX's share price fall reflected investor concern about the dilutive impact of the cash-and-shares offer, and scepticism the offer would succeed.

"If the market thought the deal was going to go ahead, I would have expected the shares to have fallen by more than 3 per cent, typically that's what we'd expect for an acquirer in a deal like this," said Michael Wu, analyst at Morningstar.

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 if the deal went through.

Citigroup downgraded HKEX to 'sell' from 'buy', saying the acquisition price was high and could "add downward pressure" to the exchange's shares and valuation. Regulatory hurdles for the deal were also high, it said in its research note.

Analysts however said they could see strategic logic in HKEX's move.

"We believe that bringing the largest listed exchanges in Asia and Europe together could create new revenue streams and a lot depends on how well HKEX can capitalise on this," Daiwa Capital Markets analyst Jonas Kan wrote in a research report.