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LSE's rejection letter attacks Hong Kong Exchange's future in troubled region

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LSE's rejection letter attacks Hong Kong Exchange's future in troubled region

London Stock Exchange Group PLC has issued a stinging rejection of Hong Kong Exchanges & Clearing Ltd.'s takeover proposal and attacked the group's relationship with the Hong Kong government and its future as a strategic gateway.

In LSE Chairman Don Robert's letter to his opposite number at HKEX Laura Cha and CEO Charles Li, he said the British company was "very surprised and disappointed" that the Hong Kong group decided to publish its proposals within two days of the LSE board receiving it.

The proposal is dependent on LSE's deal to acquire financial data provider Refinitiv not going ahead, but Robert is insistent that it is this deal that makes the most sense for LSE, not a tie-up with HKEX. He calls it a "transformational transaction, strategic and financially" and noted that the combined business would be headquartered and domiciled in the U.K.

In contrast, Robert said he saw no strategic merit in HKEX's proposal. LSE preferred its existing relationship with the The Shanghai Stock Exchange Ltd. which provided direct access to China, he said.

Robert said the proposal was certain to attract intense scrutiny from regulators but also from government entities since LSE provides critical market infrastructure, citing the U.K. Enterprise Act and the Committee on Foreign Investment in the U.S.

HKEX's largest shareholder is the Hong Kong government and the rejection letter does not shy away from Hong Kong's political turmoil, in which pro-democracy demonstrators have clashed with the Hong Kong government for months.

"There is no doubt that your unusual Board structure and your relationship with the Hong Kong government will complicate matters. Accordingly, your assertion that implementation of a transaction would be 'swift and certain' is simply not credible. On the contrary, we judge that the approval processes would be exhaustive and that support from relevant parties, vital for the transaction, is highly uncertain," said Robert.

HKEX's proposal to acquire LSE through a mixture of cash and shares is also attacked as is HKEX's claim to be a strategic gateway between the West and China.

"We see the value of your share consideration as inherently uncertain. The ongoing situation in Hong Kong adds to this uncertainty. Furthermore, we question the sustainability of HKEX's position as a strategic gateway in the longer term. The Hong Kong concentration and core characteristics of your business, together with your Hong Kong domicile and listing, present an additional set of difficulties," said Robert.

A potential combination between LSE and HKEX would create the world's largest financial exchange group in terms of revenues, according to S&P Global Market Intelligence data.

Despite the rejection, HKEX will continue to pursue its planned takeover of LSE, people close to the deal told Financial News, adding that the LSE's move has increased the probability of HKEX carrying out a hostile takeover. The Hong Kong bourse, however, reportedly prefers to continue negotiations and see the bid get fair consideration by LSE's management and other stakeholders.

A source close to HKEX told Reuters earlier that it is common for such offers to be rejected initially and that the company is already evaluating its next steps.