Hong Kong Exchanges and Clearing (HKEX) has made a proposal to the board of the London Stock Exchange Group (LSEG) to combine the two companies in a deal worth £31.6 billion.

This deal would scupper the proposed $27 billion deal for LSEG to buy Refinitiv.

“LSEG and HKEX are two of the world’s premier market infrastructure businesses, which together would offer unique potential to enhance and capture global capital and data flows. The proposed combination would strengthen both businesses, better position them to innovate across markets and geographies, and offer market participants and investors unprecedented global market connectivity,” says HKEX in a release issued today.

Laura Cha, HKEX

In the release the exchange provider says that combining the two companies would create a market infrastructure group with a global footprint, able to operate across asset classes. HKEX also argues that such a deal would leave the combined entity “ideally positioned to benefit from the evolving global macroeconomic landscape, connecting the established financial markets in the West with the emerging financial markets in the East, particularly in China”.

Indeed, HKEX is at pains in the release to emphasise how this proposal could benefit both exchanges through greater access to mainland China. 

It says that, at a time when the RMB is continuing to internationalise and emerge as a global reserve currency, this deal would secure London’s position as the global centre for both eurodollar and offshore RMB trading, providing “significant growth opportunities” for the UK. Meanwhile, it says that the deal will also reinforce Hong Kong’s position as the key gateway to mainland China and Asia, “providing a trusted and clear path for the continued opening up of mainland China’s capital markets and for the investment of Asia’s growing wealth”.

Another rationale for the deal given in the release is that combining LSEG’s global data and analytics capabilities and its distribution channels with HKEX’s access to China, which it claims is “the world’s most digitalised growth economy”, would create unique and valuable data sets for global investors.

Elsewhere, HKEX claims that the deal would enhance global capital formation through increased IPO and secondary fundraising market opportunities and would offer innovation opportunities in equities, fixed income, currencies, commodities and derivatives products.

In terms of synergies, HKEX highlights that it would migrate its trading and clearing platforms to LSEG’s technology, arguing that this would reduce costs significantly. It claims that this, combined with a revenue uplift in key businesses from cross-selling and innovation opportunities and a reduction in HKEX’s capital expenditures in connection with existing systems and future investment plans, would represent significant synergy opportunities that would benefit shareholders.

With regards to management structure, HKEX says that key LSEG management figures would continue to run the LSEG businesses and would participate in HKEX Group management following the proposed merger of the two companies. The exchange group adds that these businesses would continue to be regulated by their existing primary regulators, and it is engaged in conversations with regulators in the UK and Hong Kong to discuss the future governance of the combined entity. 

Charles Li, HKEX

Under the terms of the proposed deal submitted to the board of LSEG, shareholders of that exchange would receive £20.45 in cash and £24.95 in newly issued HKEX shares. This implies a value for the entire issued and to be issued ordinary share capital of LSEG at approximately £29.6 billion and, inclusive of net debt and other adjustments of approximately £2.0 billion, an enterprise value of £31.6 billion.

This effectively means that HKEX is offering LSEG shareholders a 22.9% premium on the closing share price of the exchange group, as of September 10, and a premium of 47.4% to the closing price on 26 July 2019, the last trading date before the first announcement of LSEG’s plans Refinitiv transaction.

And speaking of Refinitiv, one important caveat included in HKEX’s proposal for LSEG is that it will only proceed with the deal if LSEG shareholders vote down the Refinitiv deal, or if that transaction is terminated.

“We believe a combination of HKEX and LSEG represents a highly compelling strategic opportunity to create a global market infrastructure group, bringing together the largest and most significant financial centres in Asia and Europe. Following early engagement with LSEG, we look forward to working in detail with the LSEG Board to demonstrate that this transaction is in the best interests of all stakeholders, investors and both businesses,” says Laura Cha, chair of HKEX.

Charles Li, chief executive of HKEX, adds: “Bringing HKEX and LSEG together will redefine global capital markets for decades to come. Both businesses have great brands, financial strength and proven growth track records. 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. A combined group will be strongly placed to benefit from the dynamic and evolving macroeconomic landscape, whilst enhancing the long-term resilience and relevance of London and Hong Kong as global financial centres.”

Galen Stops

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