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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Hong Kong stock exchange proposes surprise £32bn merger with LSE – as it happened

Big screens and a ticker in the main entrance at London Stock Exchange, which is now being courted by its Hong Kong rival
Big screens and a ticker in the main entrance at London Stock Exchange, which is now being courted by its Hong Kong rival Photograph: Chris J Ratcliffe/Getty Images

Finally, the FTSE 100 index has closed 70 points higher at 7,338, up almost 1%.

The London Stock Exchange led the rally, gaining almost 6% to £72.06..

That’s a long way shy of HKEX’s offer, worth over £83 per share. LSE investors may be unwilling to sell to a Hong Kong bidder, especially as today’s offer is partly in cash.

David Madden of CMC Markets says optimism over the US-China trade war, and hopes of a new European Central Bank (ECB) stimulus package have boosted sentiment.

China said it will not impose additional tariffs on 16 US products, and this conciliatory move should help the trading relationship between Washington DC and Beijing.

Tomorrow, the ECB will hold their much awaited meeting, and the chatter about an interest rate cut, and possibly the announcement of a bond buying scheme too has encouraged the buying of equities.

Nathan Flanders, Global Head of Non-Bank Financial Institutions at Fitch Ratings, thinks a Hong Kong Exchange-London Stock Exchange merger could make sense:

It could come with near-term integration and deleveraging risks, but would result in more highly diversified platforms over the longer-term, better positioned to compete in an increasingly consolidated industry where scale and data are expected to drive outperformance.”

Photos: BGC Charity Day to remember 9/11

Over in Canary Wharf, a small army of celebrities have been trading stocks, shares, swaps and currencies today, to raise funds for charity.

It’s the 15th annual BGC Charity Day, created to commemorate the 658 BGC colleagues and the 61 Eurobrokers employees who died in the World Trade Center attacks on 9/11.

Prince Harry has led the way, helping to close a £1bn trade in UK government debt, or gilts, amid plenty of noise from enthusiastic traders (just remember that yields move inversely to prices, your highness, and you’ll be fine).

The organisers hope to raise around £9m for a wide group of charities, making it one of the City’s major fund-raising events.

Here’s some photos from the event:

Prince Harry , The Duke of Sussex, representing Invictus attends BGC Charity Day at One Churchill Place on September 11, 2019 in London, England. (Photo by David M. Benett/Dave Benett/Dave Benett/Getty Images for BGC)
Prince Harry , The Duke of Sussex, representing Invictus attends BGC Charity Day at One Churchill Place on September 11, 2019 in London, England. Photograph: David M Benett/Dave Benett/Getty Images for BGC
Sir Trevor Brooking representing Saint Francis Hospice attends BGC Charity Day at One Churchill Place on September 11, 2019 in London, England.
Sir Trevor Brooking representing Saint Francis Hospice. Photograph: David M Benett/Dave Benett/Getty Images for BGC
Rapper Common during the 15th BGC annual charity day at Canary Wharf in London, in commemoration of BGC’s 658 colleagues and the 61 Eurobrokers employees lost on 9/11.
Rapper Common during the 15th BGC annual charity day. Photograph: Ian West/PA
Cheryl representing The Prince’s Trust attends BGC Charity Day at One Churchill Place on September 11, 2019.
Singer and TV presenter Cheryl representing The Prince’s Trust. Photograph: David M Benett/Dave Benett/Getty Images for BGC
Damian Lewis during the 15th BGC annual charity day at Canary Wharf in London, in commemoration of BGC’s 658 colleagues and the 61 Eurobrokers employees lost on 9/11.
Actor Damian Lewis on the phone... Photograph: Ian West/PA
Damian Lewis and Helen McCrory during the 15th BGC annual charity day at Canary Wharf in London, in commemoration of BGC’s 658 colleagues and the 61 Eurobrokers employees lost on 9/11.
..and with actress Helen McCrory Photograph: Ian West/PA
Natalie Pinkham during the 15th BGC annual charity day at Canary Wharf in London, in commemoration of BGC’s 658 colleagues and the 61 Eurobrokers employees lost on 9/11.
TV presenter and F1 reporter Natalie Pinkham. Photograph: Ian West/PA
Beverley Knight BGC Annual Global Charity Day, London.
Musician Beverley Knight. Photograph: James Veysey/REX/Shutterstock
UK astronaut Tim Peake at the BGC Annual Global Charity Day, London, UK - 11 Sep 2019
UK astronaut Tim Peake. Photograph: James Veysey/REX/Shutterstock
London Mayor Sadiq Khan at the BGC Annual Global Charity Day, London, UK - 11 Sep 2019
London Mayor Sadiq Khan. Photograph: James Veysey/REX/Shutterstock
Kit Harington representing Mencap attends BGC Charity Day at One Churchill Place on September 11, 2019 in London, England.
Actor Kit Harington. Photograph: David M Benett/Dave Benett/Getty Images for BGC

Business secretary: We want overseas investment, but....

Andrea Leadsom on Bloomberg

A Hong Kong takeover bid for the London Stock Exchange could be a fine test of the government’s commitment to being open for business, while also protecting national assets from predators.

With excellent timing, business secretary Andrea Leadsom was live on Bloomberg when the news broke.

She (understandably) wasn’t briefed on the deal, but said:

We’re always keen to see foreign direct investment, and collaboration with different international interests.

But we’d have to look very carefully at anything that potentially had security implications for the United Kingdom.

Last year the UK strengthened its Takeover Code, forcing bidders to disclose more details of their plans. That followed the controversial takeover of chocolate group Cadbury by US food giant Kraft in 2009.

But this didn’t stop investment firm Melrose snapping up manufacturing group GKN.... nor did it stop Melrose shutting a factory a year later in a “breach of faith”.

Our US Politics Live blog is covering Donald Trump’s latest attack on the US Federal Reserve:

The Telegraph’s Ben Marlow makes a good point -- Brexit uncertainty has left UK assets vulnerable to foreign takeovers.

He writes:

The timing of a blockbuster bid for the London Stock Exchange from its Hong Kong counterpart could not be worse for a Government desperate to reposition itself as the pre-eminent global free trading hub.

The City will be pivotal to any such attempt to build a thriving economy outside of the European Union and the LSE is the beating heart of the Square Mile. Yet the irony of the EU referendum is that it has turned UK companies into sitting ducks.

The pound is at record lows, stock prices have tanked, and debt has never been cheaper, paving the way for any overseas investor with even modest aspirations to pick off targets at will. Blue-chip firms have been falling like dominoes.

He also thinks that government should be “crawling all over” the proposal, given the risk that China tightens its control of Hong Kong.

More here:

Full story

Here’s Mark Sweney’s news story on the potential merger of the Hong Kong and London stock markets:

Predictably, Sports Direct’s annual general meeting today turned into the usual farce.

The UK-listed company refused to let journalists into the room where the thermostat was cranked suspiciously high, almost as if they wanted it over quickly.

The main even was over in 20 minutes, while protests against SPD’s management took place outside.

But boss Mike Ashley did at least talk about the situation at the company:

The shock demand for £600m in unpaid taxes from Belgium also came up....

Will Howlett, research analyst at Quilter Cheviot, suspects a bidding war could now break out for the London Stock Exchange...

“The Hong Kong Exchanges and Clearing offer is equivalent to c. 8,361p per share and would represent a multiple of c. 37x on consensus 2020 earnings, which is a significant premium to the exchanges sector, typically trading on a multiple of 20-30x. This is an elevated multiple but we still believe there is a possibility that rivals may express an interest with the LSE seemingly ‘in play’.

“This proposed offer would disrupt LSE’s offer for Refinitiv, which we view as an attractive combination delivering high levels of earnings accretion, creating an industry leading market infrastructure provider, increasing recurring revenues and the exposure to higher growth in the US and emerging markets.

While HKEX’s offer for LSE is attractive, we believe there are more limited synergies available on the deal – reflecting the lack of overlap between the two businesses with HKEX focusing on Hong Kong and the London Metals Exchange, both areas of limited exposure for the LSE.

Expert: Hong Kong deal is a non-starter

Getting back to the LSE-HKEX merger proposal... and Neil Wilson of Markets.com has written an excellent explanation of why it won’t happen.

He argues that the British government won’t want to see the London Stock Exchange effectively in Beijing’s hands:

The UK government may not wish to see such a vital symbol of UK financial services strength, and indeed a strategic asset, to be owned by foreigners; effectively it would hand it over to the Chinese through the Hong Kong back door. For the time being at least the EU also has a say in this. The US will also be eyeing this very, very closely indeed and not liking much at all.

Shareholders in the LSE might not fancy the deal either, he suggests...

Nut and bolts - there’s not a mammoth premium here and do you as a LSE shareholder now fancy ditching your LSE stock in favour of a Hong Kong listed share (just 41% of the new company to boot) which at any moment could be appropriated by Beijing should they so desire? No thanks. Secondly, LSE is all-in on the Refinitiv deal so why would they pull out now for such a gamble? It doesn’t make sense. I guess the question now is whether this approach forces others to join the party and spark a bidding war. Not everyone is so warm to the Refinitiv deal as the stock price adjustment suggests - a better premium from say a (US) rival could look appealing to shareholders.

Trump blasts "boneheads' at the Fed

Newsflash: Donald Trump has accused America’s top bankers of being “boneheads” for not cutting interest rates.

In the latest of a series of attacks on the Fed, Trump claims that America’s interest rates should be zero -- allowing it to refinance its debts.

In July the Fed cut its overnight lending rate to 2.25% -- much higher than the zero in the eurozone, or the UK’s 0.75%.

America can currently borrow at around 1.7% per annum for 10 years, compared to 0.66% for the UK. Thanks to negative bond rates, Germany gets paid 0.5% per year when it issues a 10-year bund.

The London Stock Exchange is no stranger to merger excitement.

It has made three separate attempts to merge with its German rival, Deutsche Bourse, in the last 15 years. The latest attempt was dramatically blocked by EU competition authorities in 2017.

Paul Corren of London law firm Wedlake Bell, says:

It is not entirely a surprise that the London Stock Exchange Group is subject to a merger offer.

The LSE Group’s share price has been relatively strong year to date and HKEX see this as an opportunity to anchor the London and Hong Kong global financial centres and create a global market infrastructure leader.”

Richard Hunter, Head of Markets at interactive investor, says a merger between London and Hong Kong’s stock exchanges would be “totemic” -- and could also make strategic sense.

However.... he also believes there are some serious hurdles:

The scale of the deal is one which approximately results in the two exchanges being a merger of equals. The London Stock Exchange has historically fought off approaches from overseas, preferring instead to be the acquirer. It may also be that the likes of the New York Stock Exchange will be looking on with interest.

In addition, the very nature of the Hong Kong approach will be subject to any number of considerations, such as competitive and regulatory issues. This is quite apart from the political questions it raises, both in terms of the history between the two “countries”, as well as how an East-West tie-up might be seen in the eyes of the United States, given the current economic situation.

Part of the proposal requires that the Stock Exchange back away from its recent $27 billion deal to acquire Refinitiv, which appears to be an early stumbling block. The initial response from the Stock Exchange, which describes the approach as “unsolicited, preliminary and highly conditional”, is one which it will consider.

The proposal is a fascinating prospect, but far from a done deal. The fact that the LSE share price has already retreated from the initial 10% spike on release of the news may reflect some initial scepticism around the likelihood of the deal going through.”

Here’s some instant media reaction to the HKEX-LSE merger proposal.

Julianna Tatelbaum of CNBC calls it ‘huge’ news, with serious ramifications:

CNBC’s Joumanna Bercetche says it would help Hong Kong to win stock market business:

Bloomberg’s Benjamin Robertson calls it a bold move -- but will the LSE’s shareholders really reject its planned merger with data group Refinitiv (which it’s buying from Blackstone)?

Bloomberg’s Sarah Syed tweets:

The LSE’s shares are dropping back, as traders digest HKEX’s offer.

They’re now just 6% higher at £72.60, a long way shy of the 22% premium which its Hong Kong rival is offering.

LSE: We'll look at your £32bn bid....

Newsflash: The London Stock Exchange has issued a rather cagey response to HKEX’s approach, calling it “unsolicited, preliminary and highly conditional”.

The LSE also insists that it remains committed to its merger with data firm Refinitiv -- which would turn it into a new challenger to Bloomberg.

But, the LSE hasn’t rejected HKEX’s approach out of hand. Instead, it will consider it and then respond.

Here’s the statement:

The Board of London Stock Exchange Group plc (“LSEG”) notes the announcement from Hong Kong Exchanges and Clearing Limited (“HKEX”) and confirms that HKEX has made an unsolicited, preliminary and highly conditional proposal to acquire the entire share capital of LSEG (the “Proposal”).

The Board of LSEG will consider this Proposal and will make a further announcement in due course.

LSEG remains committed to and continues to make good progress on its proposed acquisition of Refinitiv Holdings Ltd as announced on 1 August 2019. A circular is expected to be posted to LSEG shareholders in November 2019 to seek their approval of the transaction.

Here’s our news story on the surprise battle for the London Stock Exchange:

This is the second time in three weeks that a Hong Kong group has tried to merge with a UK company.

Last month, Hong Kong’s richest man, Li Ka-shing, won control of pub chain Greene King in a £4.6bn deal.

Such takeovers are made easier by the weakness of the pound, which is down 16% since the EU referendum in 2016.

Graham Spooner, investment research analyst at The Share Centre, explains:

“Following on closely on the heels of the bid for Greene King from Hong Kong’s wealthiest person comes a bid approach for The London Stock Exchange from The Hong Kong Exchange, with the latter stating this would create a world leading market infrastructure group. Shares are up 9% on the news with investors offered 2,045 pence in cash along with 2.495 in HK Exchange shares.

“The LSE’s share price has been strong year to date and there have been thoughts the group could be a target again especially following the proposed merger with Deutsche Boerse which fell through in 2017. So although there is much uncertainty surrounding the UK some investors may benefit in the short-term from increased corporate activity.”

Updated

Laura Cha, chairman of HKEX, says her company have had “early engagement” with the London Stock Exchange about the proposal.

However, there’s no official response from the LSE yet - suggesting that engagement might not have been very friendly.

Cha says:

“We believe a combination of HKEX and LSEG represents a highly compelling strategic opportunity to create a global market infrastructure group, bringing together the largest and most significant financial centres in Asia and Europe. Following early engagement with LSEG, we look forward to working in detail with the LSEG Board to demonstrate that this transaction is in the best interests of all stakeholders, investors and both businesses.”

Shares in the London Stock Exchange have surged to a new alltime high.

Shares jumped 16% to £78.94, after Hong Kong Exchanges and Clearing surprised the City with its move on the LSE.

That values the LSE at around £27.6bn.

That’s someway below today’s proposal, which is a 22% premium to last night’s closing share price.

HKEX is offering £29.6bn, but the proposal is actually worth £31.6bn once you include the debt it would take on (the ‘enterprise value’).

This suggests the City isn’t convinced this deal will go through.....

London stock exchange share price
London stock exchange share price Photograph: Bloomberg

Hong Kong stock exchange proposes merger with London

A reception desk at the London Stock Exchange.
A reception desk at the London Stock Exchange. Photograph: Chris J Ratcliffe/Getty Images

NEWSFLASH: Hong Kong’s stock exchange has launched an audacious attempt to merge with the London Stock Exchange.

Hong Kong Exchanges and Clearing Limited is proposing to pay £29.6bn in cash and shares for the LSE.

It says that the merger would strengthen both businesses, and help them to offer new trading services across the globe.

It could help London pitch services to Chinese customer, and also “reinforce” Hong Kong’s position as the gateway to mainland China (which has been threatened by recent protest, of course).

As HKEX puts it, it will:

Create a world-leading market infrastructure group with a global footprint, diversified across asset class, ideally positioned to benefit from the evolving global macroeconomic landscape, connecting the established financial markets in the West with the emerging financial markets in the East, particularly in China.

The offer comes just five weeks after the LSE announced its own deal - a surprise merger with data group Refinitiv (part of Thomson Reuters).

HKEX is now trying to crash the party -- saying its proposal (which isn’t a full-blown takeover bid yet), is dependent on the Refinitiv deal collapsing or being rejected.

More to follow....

Updated

Stocks jump as China calms trade war

China has taken steps to de-escalate the trade war with America, by removing tariffs from 16 types of US goods.

Beijing’s State Council announced that the items, including some chemicals, anti-cancer drugs and lubricant oils, will be exempt from its latest tariffs for a year.

However, some major US products such as soybeans were not included on the list, meaning Chinese importers must still pay a tariff.

This move has cheered investors, who have driven European shares to six-week highs today.

European stock markets, 11 September
European stock markets are up this morning Photograph: Refinitiv

Neil Wilson of Markets.com says China’s move has raised hopes of a breakthrough when officials meet in Washington next month.

At the very least it suggests a willingness to engage seriously in these talks. Nevertheless I think we remain a long way and even a presidential election away from a deal.

On this note, economics professor Barry Eichengreen argues that America’s central bankers must warn that the trade war is hurting the US economy:

The “relentless sell-off in global bond markets” shows little sign of abating just yet, warns Jim Reid of Deutsche Bank.

He points to a headline yesterday, suggesting that the European Central Bank might delay launching a new quantitative easing (bond-buying) package.

However, he adds:

The headlines got the market excited but a closer read suggested that the base case from the main source in the article was that QE was still likely to be announced.

Investors are going to be on edge until tomorrow lunchtime, when the ECB announces its decisions.

Germany’s 30-year bond yield has burst back into positive territory!

The 30-year bund is swapping hands at 0.033% this morning, having fallen below zero last month. That means Berlin can still borrow very cheaply, but will have to pay some interest to its lenders.

And as with the rise in UK bond yields, it follows signs that government borrowing could be rising.

Government sources have revealed plans for a possible ‘shadow budget’, which would allow new debt to be issued by public agencies. This would circumvent the rules which ban Germany’s government from running a deficit.

The big worry is that the rise in bond yields will leave some investors with unpleasant losses.

At the end of August, the amount of debt trading at negative yields surged to $17 trillion, an all-time record. But in recent days, this has dropped back to $15 trillion.

Because yields move inversely to prices, this means anyone who bought bonds at their recent peaks is now facing capital losses. If they bought at negative yields, they won’t get any coupon (interest) payments either!

UK bond yield hits six-week high

Britain’s sovereign debt is also under pressure this morning, sending yields up to six-week highs.

The yield on UK 10-year gilts jumped to 0.666% this morning, up from a low of just 0.339% a week ago. That means it would cost the UK government more to borrow for a decade - although it’s still cheap in historic terms.

The yield on 10-year UK bonds
The yield on 10-year UK bonds Photograph: Refinitiv

UK bond yields have been creeping up since chancellor Sajid Javid announced the biggest new spending plans in 15 years.

Bond traders may have concluded that Britain will breach its deficit targets, and borrow more money to balance the books.

Updated

Here’s Mohamed El-Erian of Allianz on the latest bond moves:

Marketwatch’s Sunny Oh reckons bond traders are worried that Mario Draghi might disappoint them tomorrow, at his final meeting as ECB president.

Investors are looking ahead to the European Central bank rate decision on Thursday, where it is expected to announce stimulus measures. Push back by some ECB policy makers on the case for further easing, however, has dampened hopes that the central bank will an ambitious stimulus package.

ECB President Mario Draghi has insisted it still has policy tools available amid questions that the central bank has run out of ammunition, but analysts say it’s not clear if monetary policy can boost economic growth in a world where debt yields are already negative.

Introduction: The yields are rising....

A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York City, U.S., September 3, 2019. REUTERS/Andrew Kelly

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

For months there’s been a simple mantra in the bond market: What goes up keeps on going up. Nervous investors have driven sovereign bond prices to a series of record highs, as they have looked for a safe place for their money.

This move has pushed bond yields (the rate of return on the debt) to record lows.

As a result, many European governments have bee able to borrow at negative interest rates, with investors even willing to pay Berlin for the privilege of buying Germany’s 30-year debt.

But nothing last for ever.

And this week, bond prices have started to turn south, pushing bond yields higher.

Overnight, the yields on America’s two-year and 10-year bonds have hit one-month highs, bouncing back from their lowest levels since 2016.

That move means prices are falling, suggesting weaker demand. The move came after a US Treasury auction of three-year bonds proved disappointing.

US 10-year bond yield
The US 10-year bond yield has hit a one-month high Photograph: Refinitiv

So what’s going on?

The optimistic view is that investors are growing less nervous, and are churning their money out of bonds into other assets, which might give a better rate of return.

With a no-deal Brexit on 31 October looking unlikely, and fresh US-China trade talks imminent, the global economy could perk up. That would make low-yielding bonds look less attractive.

As Reuters puts it:

Hopes of diminishing U.S.-China tensions and reduced risk of no-deal Brexit have prompted investors to take profit in risk-off trade ahead of key central bank policy meetings.

The pessimistic view is that investors have simply got carried away in recent months and driven bond prices ridiculously high.

Many had been counting on central bankers to launch big new stimulus packages to spur growth. But those hopes may prove misplaced -- if European Central Bank (which meets tomorrow) and the US Federal Reserve disappoint investors.

As Ipek Ozkardeskaya, senior market analyst at London Capital Group, explains:

The downside correction in global sovereign markets continue in the final run-up to the ECB and Federal Reserve meetings this week and the next respectively.

Investors are trimming long speculative positions in sovereign bonds, as dovish expectations have certainly gone well ahead of what central banks would deliver at his month’s meetings. As such, the US 10-year yield recovered past the 1.70% mark, and the 10-year bund retreated past -0.55%.

Also coming up today

Troubled retailer Sports Direct is holding its Annual General Meeting. It’s a chance for shareholders to ask pertinent questions such as “What’s gone wrong with the House of Fraser takeover, Mike?”.

Boss Mike Ashley has, alas, banned journalists from attending -- but he’s been known to revoke this red card at the last minute, so the hacks might yet squeeze in.

Fashion chain SuperDry is also holding its AGM - the first since founder Julian Dunkerton won his battle to rejoin the board in April (the rest of the board responded by resigning en masse...)

The economic diary is quiet, beyond new US oil inventory data.

The agenda

  • 10.30am BST: Superdry AGM
  • 11am BST: Sports Direct AGM
  • 3.30pm BST: US weekly oil inventories

Updated

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