LSEG London Stock Exchange Group Plc

By Simon Clark, Anna Isaac and Alexander Osipovich 

The U.K. government could refuse to approve a potential $36.6 billion takeover of London Stock Exchange Group PLC by its Hong Kong rival because it forms too critical a part of the country's financial infrastructure, according to people familiar with the matter.

Officials at the Bank of England, who informally advise the U.K. Treasury, believe that the London Stock Exchange's clearing arm, LCH constitutes crucial market plumbing, according to a person familiar with the matter. This would make any tie-up unlikely to successfully pass government scrutiny on concerns about financial stability and security, they said.

"The London Stock Exchange is a critically important part of the U.K. financial system, so as you would expect, the government and the regulators will be looking at the details closely," a spokesperson for the U.K. Treasury said. "We cannot comment further on commercial matters."

U.S. regulators will also have a say in whether a deal can proceed if the offer gains traction.

Hong Kong Exchanges & Clearing Ltd. made an unsolicited offer Wednesday in an attempt to thwart London Stock Exchange's $14.5 billion takeover of financial-information provider Refinitiv Holdings Ltd. LSE said it remains committed to the Refinitiv deal.

The London exchange has hundreds of U.S. employees and operates businesses that are regulated by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority.

The Committee on Foreign Investment in the U.S., which scrutinizes politically sensitive takeovers, would also likely have a say.

"Cfius has jurisdiction," said Nova Daly, a policy adviser at Washington law firm Wiley Rein LLP who previously ran the Cfius process as deputy assistant secretary at the Treasury Department. A Cfius spokesman declined to comment.

Takeovers of stock exchanges are often fraught with political and regulatory obstacles. Germany's Deutsche Boerse AG, Nasdaq Inc. and Sweden's OM Group have all made failed bids for the London exchange. The Hong Kong exchange could also face significant hurdles, particularly at a time of fractious geopolitics dominated by a trade war between the U.S. and China.

"Once you go cross-border, generally, you get many people asking all kinds of questions like who's running the company, what's the board structure and, of course, the national aspect behind the company," said Brad Bailey, research director for capital markets at Celent in New York. "There would be a lot of mixed feelings around what would happen should a deal happen."

The London exchange has U.S. employees in "major hubs" in New York City, Fort Mill, S.C., Buffalo, N.Y., and Seattle, a spokeswoman said. The CFTC and SEC regulate its LCH SA unit, the CFTC regulates its LCH Ltd. unit and the SEC and Finra regulate its MTS Markets unit, the spokeswoman said.

"There will be significant U.S. government concern about the security of data and influence of capital flows that could result from the transaction," said a senior Washington lawyer who specializes in Cfius cases.

The history of the exchange business over the past decade is riddled with failed cross-border deals. Many of these were blocked by regulators out of concerns that a prized national asset would be taken over by foreigners, or that the takeover would give the combined company monopolistic pricing power in crucial financial markets.

In 2017, the European Union blocked a proposed tie-up between Deutsche Börse and London Stock Exchange, ending an effort to create a pan-European exchange champion. EU regulators rejected the deal on antitrust grounds, but the deal was also roiled by Britain's vote to exit from the EU just a few months after the deal was agreed.

In 2012, the EU rejected an $18.1 billion merger between Deutsche Börse and NYSE Euronext, which was then the parent company of the New York Stock Exchange, also on antitrust grounds.

In 2011, London Stock Exchange agreed to merge with Canada's TMX Group, the operator of Canada's flagship Toronto Stock Exchange, in a bid to become a trans-Atlantic exchange group. But that deal foundered after a homegrown, competing bid emerged from a group of Canadian banks and asset managers. The group, which dubbed themselves Maple Group Acquisition Corp. in an allusion to the Canadian flag, ultimately took control of TMX.

Also in 2011, authorities in Australia blocked a proposed takeover of ASX, that country's main stock-market operator, by Singapore Exchange Ltd. Canberra said the $8.9 billion deal offered little for the resource-rich Pacific nation and raised the risk of Australia losing control of its clearing and settlement systems.

Even deals within the same country can face a steep hurdle in clearing antitrust review. In 2011, the U.S. Justice Department killed an effort by Nasdaq to take over the NYSE, saying it would lead to too much concentration in the U.S. stock-exchange business.

Steven Russolillo

contributed to this article.

Write to Simon Clark at simon.clark@wsj.com, Anna Isaac at anna.isaac@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com

(END) Dow Jones Newswires

September 11, 2019 15:52 ET (19:52 GMT)

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