Hong Kong Exchange's surprise $39 billion offer for Britain's LSE

LONDON (Reuters) - Hong Kong Exchanges and Clearing made a surprise $39 billion takeover approach for the London Stock Exchange on Wednesday, aiming to sabotage the LSE’s acquisition of data company Refinitiv and create a global trading powerhouse. The unsolicited approach, a proposal contingent on the LSE ditching its $27 billion Refinitiv deal, comes at a time of political upheaval and pro-democracy protests in Hong Kong, and as Britain teeters on the brink of Brexit. The offer, which some investors and analysts said could face serious political hurdles, is aimed at creating a combined group better able to compete with U.S. rivals such as ICE (ICE.N) and CME (CME.O). “The board of HKEX believes a proposed combination with LSEG represents a highly compelling strategic opportunity to create a global market infrastructure leader,” the Hong Kong exchange said in a statement. The LSE said it would review the proposal but added that it was committed to, and continued to, make good progress on its planned acquisition of Refinitiv from a consortium led by U.S. private equity firm Blackstone (BX.N). HKEX, whose main shareholder is the Hong Kong government, said its 31.6 billion pounds cash-and-share transaction proposal represented a 22.9 percent premium to the LSE’s closing stock price on Tuesday. “It looks uncertain whether shareholders will accept the offer, given that the Refinitiv deal is popular across the shareholder base for its potential to transform the business and add value over the long-term,” said Guy de Blonay, a fund manager at Jupiter, a top-25 investor in the LSE. Such sentiments, plus the potential difficulties facing a Hong Kong company trying to buy one of Britain’s marquee financial institutions - which also owns the Milan exchange and is a major clearing house in the United States - pared market enthusiasm. After initially jumping more than 17 percent in reaction to the news, LSE shares were trading 6.5 percent higher at 1515 GMT. Refinitiv declined to comment. Its majority shareholder Blackstone (BX.N) had no immediate comment, while minority shareholder Thomson Reuters (TRI.TO) declined to comment. Reuters news agency is a unit of Thomson Reuters. The LSE has long sought to bolster its presence in Asia. However the proposed takeover comes at a time when Hong Kong is beset by turmoil. Pro-democracy protesters lit fires and vandalized a metro station near the exchange on Saturday as increasingly violent clashes with police move into their fourth month. “This is not helpful. As a financial center, trust and confidence are important,” HKEX boss Charles Li said of the protests last month, when HKEX reported a 21% fall in trading fees in the first half of the year.

On edge of Brexit

Some analysts saw the Hong Kong takeover approach as a defensive move to scupper the Refinitiv deal announced in August - aimed at transforming the LSE into a market data and analytics giant - and prevent the London exchange becoming a bigger rival. Political opposition has historically scuppered tie-ups between national exchanges, and analysts said that could be a key barrier in this case. In recent years, Western governments have become increasingly sceptical of takeovers by Chinese companies due to concerns of interference from Beijing. While Hong Kong has a separate regulatory framework from Beijing, a perception that China is increasingly asserting its control over the territory has fueled months of protests in the former British colony. “Do you as a LSE shareholder now fancy ditching your LSE stock in favor of a Hong Kong-listed share?” said Neil Wilson, chief market analyst at Markets.com. The UK Treasury described the LSE as a “critically important part” of the British financial system. “As you would expect, the government and the regulators will be looking at the (proposed deal) details closely,” a spokesman said. HKEX has been the world’s largest listings venue in five of the past 10 years, splitting the crown over that decade with the New York Stock Exchange, according to Refinitiv data. But this year it has fallen behind, raising $10.8 billion to the NYSE’s $20.2 billion, with activity suffering as the political turmoil deepened. Last month, Alibaba delayed plans for a $15 billion offering because of the unrest. The approach by the Hong Kong company comes as Britain is set to leave the European Union, a step some politicians fear could weaken its status as a major financial center. HKEX, which already has a base in London as owner of the London Metal Exchange, said it had played a key role in underpinning the City of London’s position as a pre-eminent global center for metals trading. “HKEX is fully committed to supporting and building the long term roles of both London and Hong Kong as global financial centers,” it added.