LSEG London Stock Exchange Group Plc

By Steven Russolillo and Ben Dummett 

Hong Kong's stock exchange pulled a $36.6 billion bid for its London rival, a deal that would have united two major trading hubs even as both are clouded in political turmoil.

Less than a month after it first unveiled the surprise proposal, Hong Kong Exchanges & Clearing Ltd. said it couldn't pursue a takeover of London Stock Exchange Group PLC without any input from LSE's management. The target's board had quickly rejected the approach.

The Hong Kong company had hoped a tie-up would solidify its role as a gateway for the flow of capital between mainland China and Western markets. But it said in a statement Tuesday that it was now "not in the best interests of HKEX shareholders to pursue this proposal."

Hong Kong is reeling from months of protests over concerns about China's encroachment on the semiautonomous city. Over the weekend, the Hong Kong government invoked emergency powers for the first time in half a century in an attempt to quell the unrest. When LSE rejected HKEX's offer last month, it questioned Hong Kong's future as a financial gateway to China.

Britain, meanwhile, is negotiating a messy divorce from the European Union.

Now, HKEX's challenge is to achieve its ambitions without the added scale the LSE would have brought against a backdrop of political unrest, China's economic slowdown and trade tensions that are threatening the company's appeal as a listing venue.

It also comes as its mainland China rivals move to build their own links with the West. At the same time, the Shanghai and London stock exchanges earlier this year launched a financial link between China and the U.S. that aims to make Chinese shares available to British investors and vice versa. The London exchange has cited this agreement among the reasons for rejecting the HKEX bid.

For the LSE, it's now free to conclude its own $14.5 billion plan to acquire financial-information and terminal company Refinitiv Holdings Ltd. from a Blackstone Group Inc.-led group to become a full-fledged data provider. The Hong Kong group's bid was contingent on its London rival scrapping that transaction. In a statement Tuesday, the LSE said the Refinitiv deal remains on track to close in the second half of 2020.

LSE and its rivals are increasingly focusing on selling financial data to help counteract the pressure on fees from stock-trading services and other more mature businesses. And that trend stands to gain further momentum after HKEX's failed LSE bid serves as the latest example of the challenges global exchange operators face in seeking cross-border deals with industry competitors to fuel growth.

The HKEX decision to abandon its LSE offer is also a key development for Blackstone, which is in line for a big payday if the Refinitiv deal succeeds. The big U. S-based buyout firm agreed to acquire the Refinitiv business less than two years ago in a deal that valued the new firm at $20 billion, including debt. LSE's offer values the operation at around $27 billion, including debt.

Two days after HKEX publicly released its proposal on Sept. 11, the LSE rejected the offer. It said the Refinitiv deal made more strategic sense and would face a less challenging regulatory review. LSE and rivals are increasingly focusing on selling financial data to help counteract the pressure on fees from stock-trading services and other more mature businesses.

HKEX had sought to create an Asian-European exchange giant offering trading, clearing, settlement, data and risk-management services spanning different asset classes, time zones and continents.

In a blog post on Tuesday, HKEX Chief Executive Charles Li said the "vision for the business looking forward is to build upon the role we already play in Hong Kong, China, Asia and more widely." HKEX declined to make Mr. Li available for further comment.

Shares of HKEX closed 2.3% higher on Tuesday. The stock had dropped 8.2% from when the proposal was first made public through the close of trading Friday. The deal was worth $36.6 billion at the announcement, and about $34.4 billion based on HKEX's closing share price on Friday and recent exchange rates. Financial markets in Hong Kong were closed for a public holiday Monday.

LSE shares dropped more than 6% after the bid was rescinded. Yet the stock remains up more than 70% for the year, with the bulk of those gains following the Refinitiv deal announcement.

Chinese acquisitions of foreign companies face growing scrutiny from the Committee on Foreign Investment in the U.S., the U.K., and other Western governments worried that Beijing could gain access to sensitive data and financial information.

HKEX had tried to address some of these concerns, noting its ownership since 2012 of the London Metal Exchange. It said the primary regulators of LSE's trading, clearing, data and other operations would continue to oversee those businesses, and the merged group would maintain a secondary listing in London.

The Hong Kong group could have launched a formal hostile offer, taking its proposal directly to LSE shareholders. But that would have been an uphill battle without obvious support for the deal from HKEX's own shareholders and given the market's positive reaction to the LSE-Refinitiv tie-up.

Larry Tabb, founder and research chairman of the financial markets research and advisory firm Tabb Group, said it wasn't surprising that HKEX pulled the offer, particularly with the Refinitiv bid already on the table. "It would have been a herculean effort to get it across the line," he said.

The London Stock Exchange has been involved in a string of attempted mergers and takeovers over the past two decades. It is wary of cross-border exchange deals after failing in 2011 to merge with Canada's TMX Group Ltd. and then in 2017 to join forces with Germany's Deutsche Börse AG.

--Quentin Webb contributed to this article.

Write to Steven Russolillo at steven.russolillo@wsj.com and Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

October 08, 2019 06:40 ET (10:40 GMT)

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