Don’t rule out a future SGX bid for LSE — Quentin Webb
JULY 24 — Don’t rule out a future Singapore Exchange bid for its British rival. While the Asian bourse quickly denied holding takeover talks with London Stock Exchange Group, an eventual tie-up could make financial and strategic sense.
That SGX Chief Executive Magnus Bocker should have cooled on megadeals is no surprise. His tilt at Australia’s stock market was one of a string of big exchange tie-ups killed by regulators and politicians recently. And this would be an odd time to approach LSE Chief Executive Xavier Rolet about a combination. Rolet has yet to close on an important takeover of his own, which will make the LSE a powerful force in clearing.
Nonetheless, uniting the European and Asian exchange groups could stack up. The combined company could access a wider pool of investors and issuers, offer longer trading hours, and explore other opportunities, such as clearing more Asian derivatives.
At a mooted £13.50 a share, a deal would value LSE at £3.66 billion (RM18.3 billion). Add in £910 million odd of forecast net debt, plus bid and integration costs, and SGX’s total outlay might be nearly £4.8 billion.
Suppose a deal came at the end of LSE’s next financial year, in March 2014. RBC estimates the group will ring up operating expenses of £722 million that year. SGX might hope to cut that bill by a fifth, producing £144 million of cost savings. Add that to adjusted operating profit, which RBC forecasts will hit £539 million. At LSE’s 29 per cent tax rate, that implies a total boost to SGX’s net operating profit after tax of £485 million, implying a solid 10 per cent return for the buyer.
This quick calculation ignores many wrinkles. For one, SGX uses systems provided by LSE’s US nemesis Nasdaq for trading shares, commodities and derivatives. Cost savings in exchange M&A hinge on shared technology. So unless SGX is able to extricate itself quickly and cheaply from contracts with Nasdaq, that relationship might deter a deal with LSE.
And deal structure will be important too. SGX could not afford an all-cash deal. An all-stock offer probably would not wash with British institutional investors. So a mixture of cash and paper, as planned with Australia, looks likely. Perhaps a novel, dual-listed Singapore and London structure could be created. These are problems Bocker may one day need to confront. — Reuters
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.