ASX deal failure risks making SGX a takeover target

By Michael Smith and Saeed Azhar

SYDNEY/SINGAPORE (Reuters) – Singapore Exchange (SGXL.SI: Quote, Profile, Research) CEO Magnus Bocker faces a race against time — either find a new target after the likely demise of his $7.8 billion bid for Australia’s ASX Ltd (ASX.AX: Quote, Profile, Research), or risk the SGX itself becoming prey.

Tuesday’s comments from Australian Treasurer Wayne Swan that he intends to reject SGX’s bid for ASX on national interest grounds has raised the prospect that the hunter may quickly become the hunted. “SGX yesterday moved from being an acquirer to a potential acquiree,” said Peter Elston, a Singapore-based strategist at Aberdeen Asset Management, which owns shares in SGX and ASX.

SGX shares rallied 6 percent after news broke on Tuesday that the Australian government will reject the deal, but Elston said the company faces long-term risks. SGX shares have shed about S$1.6 billion of their value since the deal was first announced in October, falling about 15 percent.

“The short-term merger risks have been removed that is why the share price reacted strongly. Longer term, there are risks of isolation and of not being able to compete with the big boys.”

One such big boy is the Hong Kong Exchanges and Clearing (0388.HK: Quote, Profile, Research), Asia’s most valuable bourse operator, which some bankers and analysts see as a possible merger partner.

But HKEx’s sheer size and gateway to the massive China market means there is little incentive for it to do a deal with SGX. HKEx has a market value of $25 billion, more than three-and-a-half times the size of SGX.

The deal could also face tough regulatory scrutiny in Singapore, where the government indirectly owns a 23 percent non-voting stake in SGX, which was the subject of much criticism in Australia.

Asked on Tuesday about the prospect of SGX becoming a target, Bocker said it was a hypothetical question.

“We are a listed and well traded company. We will deal with these questions when they happen and if they happen.”

EUROPEAN PARTNER?

Exchanges around the world are chasing cross-border deals to build scale and cut costs amid increasing competition from dark pools. The Tokyo and Osaka exchanges are in talks; Deutsche Boerse (DB1Gn.DE: Quote, Profile, Research) is competing with a partnership of Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research) and InterncontinentalExchange (ICE.N: Quote, Profile, Research) to buy NYSE Euronext (NYX.N: Quote, Profile, Research); and London Stock Exchange (LSE.L: Quote, Profile, Research) is looking to combine with Canada’s TMX Group (X.TO: Quote, Profile, Research).

Beyond Asian borders, SGX could explore a tie-up with the London Stock Exchange or team up with a weakened Deutsche Boerse if it misses out on NYSE Euronext.

But SGX’s higher valuations would be a challenge as European exchanges are trading at an average of 11.1 times 2012 earnings and American exchanges at 13.3 times versus SGX’s 19 times, UBS estimated in a recent note.

One other potential Asian candidate is Malaysia’s stock exchange operator Bursa Malaysia (BMYS.KL: Quote, Profile, Research) which has said it is open to partnerships to remain competitive.

Other regional bourses either have ownership structures that make deals difficult or impossible, or lack meaningful size to be attractive partners. Further afield, a long-rumored potential partner for SGX is the Nasdaq OMX, Bocker’s previous employer, but analysts now say the prospect of strengthening that existing relationship has been complicated by the NYSE bid. “We do not discount that, though it would be harder to convince markets that it is an equal partnership,” said Kenneth Ng, analyst at CIMB. “Mr Bocker’s track record was previously forged from merging Scandinavian exchanges into OMX before selling it to Nasdaq. Ideally, the best option would be to consolidate ASEAN exchanges before looking to consolidate at the next level.”

ASX OPTIONS

The growth options for Australia’s ASX, which faces competition on its home turf for the first time later this year and the departure of its chief executive Rob Elstone in July, look less promising. One source told Reuters on Wednesday the ASX does not have a definitive Plan B if the Singapore bid fails although it had held talks with other exchanges in the past. “No-one else will bother speaking to the ASX after this,” one investment banker said. “Can the ASX buy anything? Well, it’s not great if your government has said foreigners aren’t allowed to buy them and then you go to a foreign country and go to their government and say is it ok if we buy you.” Analysts say it would be logical for the ASX to muscle in on the LSE and TMX deal given their exposure to the resources sector. “The three share a common language, legal system and strength in mining and materials listings, and would span all three major global time zones,” New York-based Rosenblatt Securities Inc managing director Justin Schack said.

“Such a deal might be better received by the Aussie government, as ASX is currently the biggest of these three companies.” The ASX has made it clear it still wants to participate in consolidation in the region and globally and both exchanges have said they will consider other forms of cooperation if the deal falls through, although it is unclear in what form. An even less likely scenario is that Singapore salvages the deal and manages to convince the Australian government of the merits of a takeover.

“I don’t think Magnus and others in the Singapore camp feel the need to do something immediately. They can wait and see how things shake out (globally) and look for something in the future whether as a target or an acquirer,” said a banker, who asked not to be named.

(Additional reporting by Denny Thomas in Hong Kong; Editing by Lincoln Feast)

ASX deal failure risks making SGX a takeover target