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Blindsided: The surprise visit that led to shock $57b bid for the London Stock Exchange

Speaking to reporters on Wednesday, Li sidestepped a question about exploiting the weak pound, which has declined almost 20 per cent since the 2016 Brexit vote. Instead, he touted the benefits of enabling two-way capital flows from East to West, “bringing together significant financial centers of Asia and Europe” and facilitating an 18-hour trading day.

“The London Stock Exchange is a critically important part of the UK financial system, so as you would expect, the government and the regulators will be looking at the details closely,” said a spokesperson for the UK government. “We cannot comment further on commercial matters.” The government has the power to intervene in mergers on public interest grounds.

Data-driven

For its part, the LSE has already pinned its future on a world dominated by data with its $US27 billion ($39.3 billion) bid for Refinitiv, the business that used to be Thomson Reuters Corp.’s financial and risk unit. It’s currently owned by a Blackstone Group-led consortium.

After the HKEX bid was announced, an LSE statement called the offer an “unsolicited, preliminary and highly conditional proposal” and said a further announcement would be made in due course.

LSE senior managers were blindsided by the offer, said another person familiar with the situation who asked not to be named discussing matters that aren’t public. Internally, recent meetings have concentrated on the significant benefits of the Refinitiv deal, the person said.

Analysts say the bid represents a vote of confidence in London as a financial hub post-Brexit.

Analysts say the bid represents a vote of confidence in London as a financial hub post-Brexit. Credit:Bloomberg

With global political tensions rising – including protests in Hong Kong and UK President Donald Trump’s trade war with China – commercial arguments may not be the most compelling. UK regulators last year rejected a bid by a Chinese-linked consortium to take over the Chicago Stock Exchange, a deal that then-candidate Trump blasted when it was announced in 2016.

Schwimmer said in public comments in June that he believed nationalist interests made cross-border exchange mergers nearly impossible.

LSE’s shares pared earlier gains, reflecting skepticism that a deal can be done in the face of unrest in Hong Kong and potential concern over Chinese ownership. Under the proposal, HKEX would offer 2,045 pence as well as 2.495 newly issued HKEX shares per LSE share. That values each LSE share at 8,361 pence, the Hong Kong bourse said in its statement. The shares ended the day up 5.9 per cent, but almost 14 percent below the offer price.

‘Security implications’

In London, UK Business Secretary Andrea Leadsom said the UK would “look very carefully” at anything with “security implications.” The British political class may also be unwilling to court controversy given the drama over delivering Brexit.

To be sure, Britain has sought closer financial ties with China and the UK’s biggest bank, HSBC  generates more than half its profits in Hong Kong.

“The UK and even Theresa May went to China after the Brexit referendum was over, trying to lure them into a trading agreement,” said Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies. “Why would the UK all of a sudden oppose this?”

Political risk

HKEX made its bid now, after viewing this as the last opportunity to acquire LSE, said people familiar with the matter. If the British firm completes the deal with Refinitiv, it would be too big for HKEX to acquire, the people said.

Keefe Bruyette and & Woods analysts led by Kyle Voigt said in a note that the HKEX bid has higher political risks than the Refinitiv deal, and that LSE shareholders who view the Refinitiv transaction favorably see value creation well above the offer price. It said that the 14.5 per cent premium to Friday’s close wouldn’t be attractive enough for shareholders to walk away from Refinitiv.

Louis Capital analyst Ben Kelly said he didn’t expect a deal to be consummated, citing likely political opposition over national security concerns.

History is littered with failed attempts to complete cross-border exchange mergers, including at least three attempts by the LSE to combine with Deutsche Boerse AG. The final plan to sell LSE to Deutsche Boerse to create a $US30 billion behemoth fell apart when regulators blocked the deal in 2017.

“The UK government may not wish to see such a vital symbol of UK financial-services strength, and indeed a strategic asset, to be owned by foreigners,” said Neil Wilson, chief market analyst at Markets.com. “One rather feels UK shareholders will be looking at the glass half empty as far as exposure to Hong Kong goes right now.”

Bloomberg

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