Back on: The battle royale among stock exchanges
Singapore's takeover of Sydney might look like a local deal, but analysts say it could kick off a fresh wave of mergers, including London and the Nasdaq
Tuesday 26 October 2010
A rumble starting in Asia could be about to reverberate through the world of international exchanges. The Singapore Exchange's $8.3bn (£5.3bn) takeover of Australia ASX to form Asia's fourth-biggest stock exchange may at first sight look like a tie-up to give two local players more firepower. But in the highly competitive and fragmented world of exchanges, deals of this size usually have knock-on effects as other players are forced to size up their options.
The cash and shares deal valued ASX at A$48 a share – a 37 per cent premium to the company's closing price on Friday. The transaction will create a bourse that oversees a market worth about $1.9 trillion and ranks behind Tokyo, Hong Kong and Shanghai in Asia.
The deal is the first major consolidation of Asia-Pacific exchanges and followed years of talks.
Sarah Spikes, an analyst at Arden Partners, says: "I think this transaction puts global consolidation back on the agenda for exchanges. You can't let anybody get that much bigger. Some would say it doesn't pose a tremendous threat to Hong Kong but I don't think Hong Kong would see it that way.
"Every exchange with global aspirations right now has to very carefully review what the potential targets are because valuations are going to go up. There is one more exchange now with significant scale benefits and they may have global aspirations themselves – which means other exchanges need to review where they can strengthen themselves through future deals."
The effects were felt in the share prices of rival exchanges. London Stock Exchange (LSE) shares jumped 10 per cent in early trading yesterday as investors bet that the LSE could be part of any consolidation sparked by the Asian deal. The share price closed at 740p, up 5 per cent on the day, but still at a high not seen since April.
Asia is the prize that lots of Western exchanges would like to get a piece of. With its rapidly growing economies and emerging giant companies, the region would provide a rich seam of new opportunities for bourses in developed markets to get their hands on.
The problem is that there are very few Asian exchanges that would be available, and those that are publicly quoted trade on prohibitive valuations compared with those of Western bourses. Yesterday's deal valued ASX at about 23 times estimated 2011 earnings, compared with Singapore Exchange's 26 times and 32 times for the Hong Kong Stock Exchange.
Dirk Hoffmann-Becking, an analyst at Sanford C Bernstein, says: "Everybody would like to be in Asia but given the valuations for Europe's exchanges on 10 or 11 times earnings it would be a long shot to pick up something in Asia. None of the European exchanges can afford to do that."
By common consent, at some point the fragmented world of exchanges will consolidate into regional giants, with Asia forming a major part of the landscape. Exchanges that could be bought include LSE, and the Toronto and Madrid exchanges.
Arden Partners' Ms Spikes says the high valuations of Asia's exchanges mean they are in a position to pick up LSE or another Western bourse. "Now is the time to buy," she adds.
LSE was at the centre of the last round of attempted consolidation, which ended just before Xavier Rolet, the exchange's chief executive, took over. Starting in December 2004, LSE fended off approaches from Deutsche Börse, Euronext, Australia's Macquarie, Nasdaq, the New York Stock Exchange and Michael Spencer's Icap before Qatar and Borse Dubai brought an end to the feeding frenzy by buying stakes in 2008.
After the takeover mania of a few years ago, things have been quieter since Mr Rolet joined LSE 18 months ago. He has stuck to smaller deals and internal housekeeping in fending off the challenge from rivals by cutting costs, adding new services such as fixed income and buying Turquoise, the rival set up by nine banks to compete with LSE.
Turquoise struggled to keep up with Chi-X, which has grown in three years to be Europe's second-biggest trading platform and is expected to launch in Australia next year, bringing competition to the Asia-Pacific region that has already eaten into fees charged by LSE and other European exchanges.
Bernstein's Hoffmann-Becking thinks it is unlikely that the new Singapore-Australian giant will come looking for a European deal in the near future because such a move would dilute its growth opportunities. But he says the creation of a new giant player could still concentrate minds and set off another round of jostling for position – including a further attempt to combine the LSE and Nasdaq.
"Does it mean you are going to see consolidation in Europe? The logic is still there. There is a huge operating leverage opportunity here but for the Europeans that could be sold, Spain and Greece are not yet affected by competition, Italy has gone to the LSE and the French, Belgian and Dutch bourses have gone to NYSE Euronext.
"It's an industry where everybody talks to everybody else. There is some industry logic to a merger between these two [LSE and Nasdaq] but whether that happens it won't be as juicy a story as we had last time around when they were fighting each other to the end. They would be falling into each other's arms out of exhaustion."
Simon Maughan, an analyst at MF Global, says he sees the Singapore-Australia tie-up largely as a local deal but that the LSE is still apotential target in any further industry consolidation.
"It is a target," he says. "Much as they might like to see themselves as a consolidator, they are there and they can be bought."
Ultimately, he says, "consolidation is always going to be the likely outcome. The question is when, how and at what price?"
A local deal it may be at the moment, but with exchanges constantly weighing up the route to the endgame, the creation of a new powerhouse in Asia – with its increasingly powerful position in the world economy – will refocus minds on survival and what moves are needed to ensure it.
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