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It's Open Season on the London Stock Exchange

Chris Hughes

(Bloomberg Opinion) -- London Stock Exchange Group Plc left gatecrashers a window of only a few months to try to break up its $27 billion takeover of data provider Refinitiv. Hong Kong Exchanges and Clearing Ltd. has moved fast and first with a potential bid for LSE worth 30 billion pounds ($37 billion). On the surface its proposal is better than the LSE’s own deal, but the path to a firm offer from Hong Kong that runs all the way to completion is fraught with uncertainty.

LSE’s agreement to buy Refinitiv (which competes with Bloomberg LP, the parent of Bloomberg News) has forced the hand of anyone who wants to buy the London bourse. If LSE’s shareholders approve the Refinitiv deal, the British company will become too big a target. With the vote on that transaction due by the end of 2019, any auction among LSE bidders would have to happen this year.

Of course, investors liked the Refinitiv deal. LSE’s shares rose 20% afterwards. That gain reflected both the probable value creation from a tie-up and the possibility of an approach from an interloper stung into action, such as the one that’s just arrived from Hong Kong.

But a bidder doesn’t have to offer a huge premium on top of where LSE shares are now. The real benchmark for a bid is where the LSE shares were trading before its offer for Refinitiv. The choice now for the LSE’s board and shareholders is between a future reaping synergies from Refinitiv or being taken over by another exchange and taking an upfront premium.

A suitor therefore just has to offer more value than what comes from the Refinitiv deal, with comparable certainty. HKEX is certainly trying hard. Its cash and stock proposal is worth nearly 84 pounds per LSE share based on its last closing price. That’s almost 50% higher than where LSE was trading in July before the Refinitiv deal. It’s also 23% above where LSE was trading yesterday. These are serious numbers.

That said, the proposal is only one-quarter in cash. Investors therefore need to believe that the long-term investment case for an Anglo-Asian tie-up is stronger than that for the LSE-Refinitiv combination. HKEX’s ownership of London Metal Exchange hasn’t been an unmitigated success. The company argues that its LSE bid could let shareholders capture capital market opportunities from a rising China. That alternative growth story may be persuasive.

The odd aspect is HKEX’s tactics in making its proposal public without any evident support from LSE. The target has said cautiously that it will weigh the approach, while noting it was a long way from being fully baked. But HKEX’s decision to reveal its hand, however warm, isn’t altogether friendly. It’s designed both to show commitment and to put pressure on the LSE’s board to engage. Stock exchanges are – rightly or wrongly – national treasures. It’s hard to imagine a hostile bid succeeding so Hong Kong will somehow need to bring LSE management onside.

That dovetails with the political considerations. The LSE deal with Refinitiv would create a London-based global exchange and data powerhouse. Hong Kong is proposing a straight takeover. There are questions too over the territory’s future as a financial center after the recent protests. And while the LSE may not be cheap on financial metrics – the proposal values it at 26 times expected Ebitda – this might be seen as the ultimate Brexit grab of a prize U.K. asset.

These considerations leave the LSE vulnerable to other bids too. The obvious candidate is Intercontinental Exchange Inc of the U.S. Watch this space.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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