Hong Kong stock exchange bids for London counterpart

This Thursday, Sept. 22, 2011 file photo shows a sign outside the Stock Exchange in the City of London. The Hong Kong stock exchange said Wednesday Sept. 11, 2019, it has started talks to buy the London Stock Exchange that would value the British company at 29.6 billion pounds ($36.6 billion). (AP Photo/Matt Dunham, File)
This Thursday, Sept. 22, 2011 file photo shows a sign outside the Stock Exchange in the City of London. The Hong Kong stock exchange said Wednesday Sept. 11, 2019, it has started talks to buy the London Stock Exchange that would value the British company at 29.6 billion pounds ($36.6 billion). (AP Photo/Matt Dunham, File)

LONDON -- The Hong Kong stock exchange wants to buy its London counterpart to create a $70 billion company, a move that faces big hurdles and likely will raise concerns in Britain about the Chinese government's potential influence over one of the symbols of global capitalism.

The London Stock Exchange, a 300-year old institution that was at the heart of a British empire that included Hong Kong, said Wednesday that it would consider the cash-and-shares offer that values it at $36.6 billion.

A deal would give it a lucrative foothold in Asia, a fast-growing region that could be attractive if Britain ends up leaving the European Union without a deal, a scenario that would see an array of trade barriers go up with its neighbors.

But while investors cheered the move, pushing shares in the London exchange up 6%, many experts remained skeptical, not least because the company has been subject to failed deals in the past.

One aspect of the proposed deal that could give leaders at the London exchange and British regulators pause is the fact that at least half the board, including the chairman, of the Hong Kong Exchanges and Clearing Ltd. is nominated by the Hong Kong government, whose leader is ultimately appointed by China's communist rulers.

The Chinese government is the largest shareholder of the Hong Kong exchange, with the right to name six of its 13 board members, and Beijing's response to the anti-government demonstrations in Hong Kong is likely to lead British officials to closely scrutinize the deal for any signs of Chinese government influence. Britain's business minister, Andrea Leadsom, said Wednesday that regulators would "look very carefully at anything that had security implications for the U.K."

"The proposed offer would be totemic in terms of East-West relations," said Richard Hunter, head of markets at Interactive Investor. "The very nature of the Hong Kong approach will be subject to any number of considerations, such as competitive and regulatory issues."

As a result, he said, it's "far from a done deal."

Many Western governments are increasingly at odds with China over its state-led control of many companies and markets, and regulators may be wary of giving Beijing indirect control of a key stock exchange like London's.

The United States, a key British ally, is in a wide-ranging campaign to stifle China's rise to economic and technological pre-eminence, so this deal could raise political questions.

Then there is the fact that the London Stock Exchange already has vowed to tie up with London financial-data provider Refinitiv for $27 billion. A deal with Hong Kong would be contingent on that deal being abandoned.

Hong Kong exchange Chief Executive Officer Charles Li acknowledged the company was coming late with its offer, but hoped to win over the London exchange in a "corporate Romeo and Juliet" story.

Refinitiv's appeal is its data, viewed as a lucrative new business operation that would help the London exchange move on from being a simple trading platform.

In Hong Kong's favor is that a deal in Asia would give the London exchange, which also owns the Milan exchange and the Russell indexes in the U.S., access to a new market whenever it leaves the EU. As things stand, Britain is due to leave the EU, which it has been a part of for 46 years and with which it has extensive and deep economic ties, on Oct. 31.

If it leaves without a breakup deal, then tariffs and more red tape will be imposed on trade with the other 27 European Union countries. Financial services are a big part of the British economy and a no-deal exit from the European Union will lead to a period of disruption, at least in the short-term.

Britain's pro-Brexit government has proclaimed its desire to turn to markets beyond Europe to shore up business and London's role as a financial hub, so a deal in Asia for the London exchange could be viewed as an asset.

"A combined group will be strongly placed to benefit from the dynamic and evolving macroeconomic landscape, while enhancing the long-term resilience and relevance of London and Hong Kong as global financial centers," Li said.

For the Hong Kong exchange, the potential deal has been made cheaper by the 20%-or-so fall in the pound in the wake of the country's 2016 decision to leave the EU. The currency this summer trended down toward its lowest level against the dollar since 1985, effectively making British companies cheaper. That's certainly the case for companies in Hong Kong, whose currency is pegged to the dollar.

The deal could help the Hong Kong exchange diversify at a time of tensions in the city over the Chinese government's influence. Pro-democracy protests in Hong Kong after Beijing's attempts to exert greater control have created uncertainty over the city's role as an international business hub.

But the protests, if anything, could harden opposition by the London exchange, its shareholders or British authorities.

"There is a very high bar to clear in order for this to succeed," said Neil Wilson, chief market analyst at Markets.com.

British takeover rules say the Hong Kong exchange now has 28 days to either make a firm acquisition offer for the London Stock Exchange or walk away.

Information for this article was contributed by Carlo Piovano and Kelvin Chan of The Associated Press and by Carlos Tejada and Michael J. de la Merced of The New York Times.

Business on 09/12/2019

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