Hong Kong’s Unwelcome $36.6 Billion British Proposal

A surprise bid for the

London Stock Exchange


LSE 5.91%

is unlikely to persuade it to abandon a popular tie-up with data provider Refinitiv.

Hong Kong Exchanges and Clearing


388 0.33%

on Wednesday offered to buy its London rival for £29.6 billion ($36.6 billion) in cash and stock—a deal it promised would unite two of the world’s top financial centers to create a leading market infrastructure group.

It is a corporate “Romeo and Juliet” story, according to HKEX Chief Executive

Charles Li,

who confessed to admiring LSE “for a long time.” Acknowledging he was late to the party, he said he wanted the British company to spurn its current engagement and instead run away with him. Not only is Mr. Li late; he also wants to supplant a merger partner well liked by the extended family. As of Tuesday’s close, investors had bid LSE’s shares up by 20% since it announced the $14.5 billion Refinitiv deal in late July. Combining LSE with the operator of the Eikon trading terminal would create a financial data and infrastructure company to challenge Bloomberg, and the deal also comes with a large earnings-boosting dose of debt. LSE expects to send the details to shareholders in November for their approval.

Mr. Li’s vision is instead to bring together the finance hubs of low-growth Europe and high-growth Asia. His deal would diversify both companies geographically and across asset classes, create an 18-hour trading day and integrate trading with post-trade and data services. The partners could “link the plumbing” underlying their markets to enhance capital flows, combining Hong Kong’s access to Chinese assets with the capabilities of LSE’s dominant LCH clearing house. Near-term cost synergies would come primarily from retooling in Hong Kong with the British company’s systems. Mr. Li sees longer-term benefits from expanded capital flows into and out of Asia. To turn LSE’s head, the Hong Kong exchange has offered to pay a 23% premium, based on both companies’ Tuesday closing prices. However, it wants to pay three-quarters of the sum required in stock, making it less attractive to LSE’s shareholders, who would end up with around 41% of the combined company. There are also questions over how much influence Beijing might have over the combined company. Half of HKEX’s board is currently appointed by the Hong Kong government. HKEX officials said each bourse would continue to be regulated by its home-market officials and key LSE management would stay on. Similar concerns were raised when HKEX bought London Metal Exchange in 2012, which the company said have proved unfounded. However, rising U.S.-China trade tensions are making it more difficult for companies to balance demands from the Chinese and Western governments.

HSBC

has faced challenges in China since providing information that helped U.S. prosecutors build a case against Huawei. A combination of LSE-HKEX might find itself similarly torn. LSE’s share price jumped around 15% on the news but settled back closer to 5% up. With a high bar set by the Refinitiv deal, shareholders seem unconvinced. Mr. Li will have to offer much more if he hopes to entice his London rival to jump.

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