FOCUS: Metals industry sees roadblocks to HKEX-LSE deal

The proposal by Hong Kong Exchanges & Clearing Ltd (HKEX) to buy the London Stock Exchange Group (LSEG) has raised a number of questions among metals market participants, most of whom are skeptical that the deal will go through during a time of political upheaval.

HKEX’s £29.6-billion ($36.5-billion) proposal to acquire the LSEG was announced on Wednesday September 11, and comes seven years after the Hong Kong business acquired the London Metal Exchange for £1.4 billion.
The purchase of the LME from its members gave HKEX a global presence outside of Asia and was deemed controversial by some in the metals market at the time the deal was announced.
Now HKEX has announced its intent to broaden its global presence further by acquiring the LSEG, raising eyebrows for a second time.
“I can’t really see how any antitrust authority would approve having the two big London exchanges under one umbrella,” one trader said.
“It is less about what HKEX and the LME want to do but more about what the Financial Conduct Authority will say, it’s one to watch,” a second trader said.
Sources close to the matter told Fastmarkets that there are no regulatory issues with HKEX owning both the LME and the LSEG. 
“The factual position is that there would clearly be no overlap in the businesses. Both are leaders in their own individual fields,” a spokesperson for HKEX said.
HKEX and the LME declined to comment further given that the proposal is still in its early stages.
The LSEG responded to the offer by saying it was unsolicited, preliminary and highly conditional, noting that there have been failed mergers of the same variety in the past.
A $31-billion merger between LSEG and Germany’s Deutsche Börse fell through in March 2017 following a European Commission anti-monopoly ruling, which also blocked the sale of the Paris arm of LSEG's London Clearing House (LCH) to French bourse Euronext.
Regulators in the United States also quashed an attempt by a group of China-based investors to acquire the Chicago Stock Exchange in 2018.
Yet, there are a number of equity and commodities exchanges that are already linked. The Intercontinental Exchange (ICE) in the US, for example, owns a number of financial and commodities exchanges, including the New York Stock Exchange.
“I don’t foresee any problems if HKEX were to pursue the purchase of LSE; they will be able to work side by side and there are no rules to say this is a problem,” a market source said.
“The deal most certainly can go through and it will be better than the proposed Refinitiv deal,” a source close to the merger discussions said, referring to LSEG’s proposed $27-billion merger deal with global financial solutions company Refinitiv.
A condition of HKEX’s proposal is that the LSEG’s deal with Refinitiv must not be completed.
HKEX said on September 11 that, under its ownership, LSEG's businesses will continue to be regulated by their existing primary regulators and that it had begun conversations with certain regulators in the United Kingdom and Hong Kong.
Fueling political fire?
Political uncertainty could be the biggest headwind to the proposed deal, with both the UK and Hong Kong currently mired in political upheaval.

Alice Mason

alice.mason@fastmarkets.com

Published

Alice Mason

September 12, 2019

18:18 GMT

London