HK’s Doomed LSE Bid

Belgius Capital Commentary

Belgius Capital

HK’s Doomed LSE Bid

The strange case of a bid not making much sense.

Late this summer, The Hong Kong Stock Exchange announced an intention to mount an unsolicited cash & stock offer for the London Stock Exchange – but chances at the outset were not good for it to succeed. Indeed, on the face of it and in terms of ‘vaulting ambition,’ it could not be faulted in what would have been a game-changer for global financial markets, creating a powerhouse to rival all others.

The Hong Kong Exchanges and Clearing’s (HKEX) £30 billion ($37 billion) takeover bid maybe one that could “create a truly global market infrastructure group connecting the East and the West.” But most market observers saw such an arrangement as a growing Chinese influence over vital global financial infrastructures – right at the very heart of Europe. Hong Kong’s proposal could have created the world’s third-biggest stock exchange group –behind the New York Stock Exchange and the NASDAQ in terms of the market capitalization of the companies listed on those markets. This deal would have made HKEX a monolith of a financial force to contend with.

But from the start, the deal was doomed. Analysts at Citi, for example, downgraded the HKEX (HKXCF) stock to “SELL” on the basis that the deal puts HKEX in an uncompromising position – as the offer price is seen as too high and faced stringent regulatory risks. This transaction would have given Hong Kong control of the equity markets in the UK and Italy as well as an open line to key channels for European debt markets – and therefore an elevated political risk not just for the UK but for the EU.

The deal would not just be a concern for UK Regulators. The US would likewise block such an arrangement. The London Clearing House (which is also owned by the London Stock Exchange (LSE)) also clears all the domestic interest rate swaps in the United States and is co-regulated by both The Bank of England and the US Commodity Futures Trading Commission. And the US is on an active lookout on the increasing control of Chinese money on vital global infrastructure.

Currently, amid unparalleled social unrest, Hong Kong’s stature as a key financial center is losing ground, and Beijing is making sure of that. Beijing’s strategy is to make HK irrelevant and is moving to empower Shanghai as an alternative to Hong Kong. Currently, the London Stock Exchange has special arrangements with the Shanghai Stock Exchange. For the LSE to embrace the HK deal was not a good idea quite apart from conflicting interests - with Shanghai now moving closer as the more significant market for international trade, not Hong Kong. Herein lies the conundrum; given that Beijing [Mainland China] were opposed to the deal, how did it ever get off the ground in the first place? Even more surprising given the political and social unrest and upheaval in HK since the spring.

And then there is Brexit. A post Brexit environment may mean deepening financial ties with China [read Shanghai] as the better alternative to a slow-growth Europe.

So really, there is no value proposition for the UK to align with Hong Kong right now. And maybe not even in the foreseeable future.

So, the deal was dead on arrival. Because regulators from the UK, the US, the EU, and even perhaps surprisingly, Beijing would not allow it.

Which now begs the question who was behind HKEX bidding for the LSE and why?