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London Stock Exchange Likely To Reject Merger Offer By Hong Kong: Reports

London Stock Exchange Likely To Reject Merger Offer By Hong Kong: Reports
Amidst questions being raised about political risk and deal structure, the London Stock Exchange (LSE) is set to denounce the acquisition offer of £32bn made by the Hong Kong Stock Exchange, claimed reports quoting unnamed sources informed about the matter.
Investors at the LSE were stunned by the unsolicited bid from Hong Kong Exchanges and Clearing (HKEX) and some of them even called the bid to be audacious. 
The LSE had said that it would follow through on its pledge of the $27bn acquisition of data and trading group Refinitiv even as the bid for its merger was made by the HKEC. According to reports, the LSE is likely to reject the merger offer.
There was a 3 per cent drop in the HKEX’s in early trading in Hong Kong on Thursday which resulted in erosion of the share capital from the company of about $1bn. HKEX operates the fourth largest equity trading market of the world in terms of turnover.
LSE shares were valued at £83.61 per share in the HKEX’s bid and the offer document said it hoped to combine “the largest and most significant financial centres in Asia and Europe”.
There is political instability and uncertainty in both the United Kingdom and Hong Kong – the places where the two exchanges are situated, as well as a turning juncture for the global exchange industry. There is a rising trend among stock exchanges to venture into business of supplying and monetising the data that is at the heart of markets and slowly shifting focus from the core business of trading.
Dealmaking in the exchange industry has been invigorated by the acquisition of Refinitiv by the  LSE, pending shareholder approval of the acquirer. If the deal goes through, LSe will gain enough resources to present strong competition to global exchange leaders such as the Intercontinental Exchange and CME Group.
According to analysts, because of social unrest in Hong Kong, the tie-ups between national exchanges was likely to face severe political opposition and political opposition has historically prevented such mergers.
A major role in the investigation of global capital markets is played by trading venues and clearing houses that are owned by the LSE.
The LSE “is a critically important part of the UK financial system . . . as you would expect, the government and regulators will be looking at the details closely,” a UK government spokesperson was quoted by the media as saying.
HKEX said that its offer is valued at an estimated 8,361 pence per LSEG share and the value is 23 per cent higher than LSEG's closing share price on Tuesday. The offer from HKEX comprises of 2,045 pence in cash and 2.495 newly issued HKEX shares for each LSEG share which would result in a total ultimate valuation o about £29.6 billion or $36.6 billion.
LSE’s market data could be monetized in China and the deal would help in connecting LSE tio the fast growing domestic capital market of China, HKEX said.
The Hong Kong group would also gain control of clearing house LCH, which has the LSE as its majority stake holder, if the merger bid is accepted by the LSE.  
HKEX was “trying to diversify away from their Chinese exposure, which is why they are bidding now and not nine months ago,” one top 10 LSE shareholder was quopted as saying in the media. “Shareholders won’t be rushed to make a decision as we like the Refinitiv deal,” the investor added. “If this is an opening gambit by HKEX and they go 10 per cent higher, then it will be a case of what might happen in the short term to the LSE share price versus a five-year view on where the share price can go on a successful Refinitiv integration.”

Christopher J. Mitchell

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