LSEG Board Swats Aside HKEX Proposal, Stays Focused on Refinitiv

The board of the London Stock Exchange Group (LSEG) has unanimously rejected the unsolicited offer made earlier this week by Hong Kong Exchanges and Clearing (HKEX) to acquire the entire share capital of LSEG.

“The board has fundamental concerns about the key aspects of the Conditional Proposal: strategy, deliverability, form of consideration and value,” says an LSEG release issued today.

Moreover, the exchange group made it clear that it is still intent on buying Refinitiv, stating in the release: “LSEG remains committed to and continues to make good progress on its proposed acquisition of Refinitiv Holdings Ltd. Regulatory approval processes are under way and a circular is expected to be posted to LSEG shareholders in November 2019 to seek their approval of the transaction. The transaction remains on track to close in H2 2020.”

LSEG also released a letter today, signed by its chairman, Don Robert, outlining more reasons why the exchange operator was rejecting the proposal from HKEX.

For starters, Robert also immediately highlights the deal agreed by LSEG on August 1 to buy Refinitiv, which he says will be “a transformational transaction, strategically and financially”.

He adds: “The financial and strategic logic of the Refinitiv transaction has been exceptionally well received. Since the Refinitiv announcement, the LSEG share price is up c.29%, a value increase of c.£5.8bn. There is positive market sentiment about the potential for further value creation for the enlarged group and the board is confident that significantly greater value can be achieved.”

The reason why Robert emphasises this is because one of the conditions for the HKEX proposal was that LSEG would have to back out of the Refinitiv deal, something that the board clearly has no intention of doing voluntarily.

Robert also dismisses the HKEX offer by stating that LSEG does not see strategic merit in the proposal. Robert says that that “the high geographic concentration and heavy exposure to market transaction volumes in [HKEX’s] business would represent a significant backward step for LSEG strategically”.

Profit & Loss previously reported that the argument put forward by HKEX for merging the two companies focused heavily on accessing growth opportunities coming out of China, but while Robert acknowledges the scale of such opportunities in his letter, he adds that LSEG does “not believe HKEX provides us with the best long-term positioning in Asia or the best listing/trading platform for China”. He also notes that LSEG already has a partnership in place with the Shanghai Stock Exchange, adding that this “is our preferred and direct channel to access the many opportunities with China”.

The letter from Robert also questions the viability of the transaction proposed by HKEX. He points out that it would be subject to significant scrutiny from a number of different regulators and government entities, adding that the “unusual” board structure of HKEX whereby the Hong Kong government appoints half of the exchange’s board members would “complicate matters” were the two firms to proceed with the proposal.

Thus Robert subsequently writes: “Accordingly, your assertion that implementation of a transaction would be “swift and certain” is simply not credible. On the contrary, we judge that the approval processes would be exhaustive and that support from relevant parties, vital for the transaction, is highly uncertain. This would pose serious risk for our shareholders.”

Another reason given by Robert for dismissing the HKEX offer is that three quarters of the value of the proposed deal to existing LSEG shareholders is that they would get HKEX shares. He says that the value of these shares is “inherently uncertain” and that the “ongoing situation” in Hong Kong right now only adds to this uncertainty, whilst also questioning “the sustainability of HKEX’s position as a strategic gateway in the longer term”.

And finally, Robert says that the HKEX valuation of the LSEG falls “substantially short” of its worth, “especially when compared to the significant value we expect to create through our planned acquisition of Refinitiv”.

He concludes: “Taking all of these factors into account, the Board unanimously rejects your proposal. Given the fundamental flaws in your proposal, we see no merit in further engagement.”

Galen Stops

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