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HKEX must cough up the cash for a chance of winning LSE

Hong Kong Exchanges & Clearing Ltd. must offer more cash to woo London Stock Exchange Group PLC investors unenthusiastic about the current cash and shares proposal, said a leading shareholder.

The proposal values the British bourse at £31.6 billion, and under the deal LSE shareholders would receive £20.45 in cash and 2.495 HKEX shares for each LSE share, implying a value of £83.61 for each LSE share. The offer represented a 22.9% premium to LSE's closing price on Sept. 10, the day before the offer.

But investors regard HKEX's requirement that LSE's own offer to acquire financial data firm Refinitiv in a $27 billion deal must be dropped as a major sticking point.

"LSE shareholders have been pretty supportive of the Refinitiv deal and that deal won't go ahead under HKEX's current proposal. HKEX needs to address that. It is a big part of the discussion. They must either restate their proposal to include Refinitiv, or, more likely, offer more cash," said the investor, speaking on condition of anonymity.

Royal London Asset Management Ltd., another shareholder in LSE, has said the risk of the HKEX deal not completing, along with the high level of shares in the proposed offer, does not compensate for the lost potential of the LSE-Refinitiv tie-up.

Stumbling blocks

LSE rejected HKEX's offer, insisting its deal with Refinitiv made more strategic sense while taking a swipe at HKEX's close ties with the Hong Kong government, its biggest shareholder, which is currently under pressure amid pro-democracy demonstrations. It also said assuaging regulatory concerns would be a major issue for any merger to go ahead.

HKEX declined to comment but has said previously that it will continue to engage with LSE investors over its initial proposal. It has also told investors with concerns over the proposed merged company's governance that it would be different to that of HKEX, and is understood to have said it would work with regulators to work out a structure of governance that would be acceptable.

The Hong Kong bourse is also understood to have told investors concerned about the Hong Kong government's near 6% stake in HKEX that Blackstone Group Inc., the U.S. private equity firm, will hold a 37% stake in the merged company if LSE's deal to acquire Refinitiv goes ahead. HKEX said in response to LSE's rejection of its proposal that it had held "initial constructive discussions" with regulators and policy makers.

A fresh offer?

Jos Dijsselhof, CEO of the Swiss stock exchange SIX Group AG, said on Sept. 25 that he expects HKEX to increase its offer for LSE but he said he regards the probability of the deal going ahead as low. He noted that LSE's own deal to acquire Refinitiv appeared to have widespread market support and regulatory support, in contrast to HKEX's proposal.

Analysts at Citi expect another offer to materialize from HKEX, suggesting a revised bid with a higher cash component compared with the rejected 25% cash, 75% shares mixture. Citi also suggested HKEX would have to assuage concerns on the independence of a merged group and provide more detail on why the deal would be beneficial compared with LSE's deal for Refinitiv.

Exane BNP Paribas analysts said there was scope for HKEX to offer a cash sweetener to persuade LSE investors to accept their proposal.

"Nonetheless, with LSE management having strong backing from the board and from shareholders on Refinitiv we think HKEX would need to go hostile, which further reduces the probability of success," said Exane BNP.

Regulatory concerns are likely to play a key part in any renewed takeover proposal from HKEX. The British government has already described LSE as a "critically important" part of the financial system. LSE Chairman Don Robert cited the U.K. Enterprise Act that allows the government to intervene in mergers if there is a "public interest consideration," while in the U.S. he said any deal would be likely to face scrutiny from the Committee on Foreign Investment in the U.S.