Financial Times Europe - 12.09.2019

Thursday12 September 2019 ★ FINANCIAL TIMES 13

COMPANIES

P H I L I P STA F F O R D, OW E N WA L K E R
A N D H U D S O N LO C K E T T

CharlesLi,chiefexecutiveofHongKong
Exchanges Clearing, began his sales
pitchwithplentyofflatteryforLondon’s
statusasafinancialcapital.
The City of London is “the most com-
petitive, the most confident and most
embracing in good times and in bad
times,” said the 58-year old as he
addressed the media just hours after
HKEX went public with a £32bn bid to
buytheLondonStockExchange.
The audacious proposal is the latest
salvo in the consolidation of the
exchangeindustry,whichhasseenoper-
ators push deeper into the slicing and
dicing of financial data and increasingly
seekglobalscale.
ItcomesjustweeksaftertheLSEchief
executive David Schwimmer agreed to
buy the data and trading business of
Refinitiv, best known for the Eikon ter-
minals, for $27bn, in a deal that had
beengreetedwithacclaimbyinvestors.
“I’mcertainlysupportiveoftheRefin-
itiv deal, and the market is as well,” said
Iacopo Dalu, analyst at Janus Hender-
son,atop50shareholder.“Sothehurdle
for HKEX to convince LSE’s sharehold-
ers, its management and regulators is
clearlyveryhigh.”
The HKEX had been considering an
approach for the LSE for some time, but
Mr Schwimmer’s ambitious deal for

Refinitiv aught the company unawaresc
and prompted its approach, according
topeoplefamiliarwiththematter.
But investors’ attachment to the
Refintivdealisnottheonlyobstaclefac-
ing Mr Li, who briefly worked on oil rigs
and a journalist before moving into
finance. Politics has a history of scup-
pering cross-border tie-ups between
exchanges and this proposed transac-
tion is especially fraught, analysts and
investorssaid.
Fears that Beijing is encroaching on
Hong Kong’s independence has brought
hundreds of thousands on to the streets
in mass protests in recent months, leav-
ing relations between China and the
formerBritishcolonyattheirlowestebb
inyears.
“The Hong Kong stock exchange
wants to globalise and it’s the right time
to do this, because if they don’t do it
right now it won’t be possible to make
the proposal later on, said Ronald Wan,
chief executive of Partners Capital, a
Hong Kong investment firm. “This
transaction is already very political

because it will be seen as a potential

takeover from China. If they don’t do it

right now it will be even more political

in the next few years and it will be

impossibletocomplete.”

A person familiar with the HKEX,

whose largest shareholder is the Hong

Kong government, insisted that there

had been no prior discussion with Bei-

jing about the deal and that it was insti-

gatedforcommercialreasons.

Mr Li sought to portray the deal as

another corporate transaction. “We see

no reason why any of the temporary dif-

ficulties that everyone else is going

through should be the obstacle for great

thingstohappen.”

Mr Schwimmer himself had said over

thesummerthatcross-borderexchange

deals were difficult to do because of

political sensitivities. The LSE’s LCH

clearing house is the main clearer for US

dollar-denominated swaps — and it also

owns a clearing house in Italy that con-

nects to the European Central Bank’s

settlementsystem.

HKEX sought to shift the focus onto

the commercial logic of the deal, which

is based on trying to knit together the

growing domestic Chinese savings mar-

ket and the rest of the world. Buying the

LSE would hand the Hong Kong opera-

tor LCH, the stock exchange itself as

well as the UK company’s valuable indi-

ces business. “[This deal] is not driven

by listings. It’s about connecting the

plumbingofthetwomarketsofEastand

West,”saidMrLi.

The group is also betting that the ren-

minbiwillbecomeamajorinternational

currency, leaving London well placed to

capitalise as tensions with the US fray.

Mr Li pointed to the explosion of the

Eurodollar market in the 1960s when

US banks deposited billions of dollars

offshore in London. London’s modern-

day strength in forex and swaps trading

and clearing has flowed from that start-

ing point. Last year trading volumes in

London for the renminbitopped hoset

ofthepoundagainsttheeuro.

“In the future decade when the two

centres of financial gravity, the US and

China are growing increasingly more

apart,Ithinkit’scriticalforthefinancial

systemtohavealinkage,”hesaid.

Although Mr Li sought to gauge the

LSE oard’s interest, the latter’s com-b

mitment to the Refinitiv deal made

detailed discussions difficult, according

to two people involved in the discus-

sions. In a statement yesterday the LSE

said that it remains committed to the

Refinitiv deal. “It is unlikely that David

Schwimmer [LSE chief executive] is

very keen to work as a divisional man-

ager,”notedanalystsatCommerzbank.

For HKEX the transaction would also

cut its dependence on listings from

China. Chinese companies account for

78.5 per cent of the $442bn in initial

public offerings carried out in Hong

Kong since the start of 1998, according

to FT calculations based on Dealogic

data. Combining China’s massive fixed

income and data markets and the LSE’s

knowhow in developing indices would

alsodriveearnings,thegroupsaid.

But in spite of Mr Li’s charm, the mar-

ket was giving HKEX’s cash-and-shares

bid little chance of success. After an ini-

tial spike, LSE shares closed at £72.06,

far below from the £83.61 valuation

HongKongputonit.

“It looks uncertain whether share-

holders will accept the offer, given that

the Refinitiv deal is popular across the

shareholder base,” said Guy de Blonay,

fund manager for global equities, at

Jupiter a top 30 shareholder. Mr Li has

hisworkcutout.

See Lex

HKEX’s tough task to win over sceptics on LSE

Exchange boss

begins charm

offensive after

stunning investors

with £32bn bid for

London bourse

HKEX’s move for LSE

Share price ()

LSE HKEX oer















Jan   Sep

David Schwimmer becomes CEO of LSE

LSE bids for financial data provider Refinitiv

Sources: Refinitiv; World Federation of Exchanges; Bloomberg

Total value traded of shares globally (tn)











    

Revenues (bn)

     

ICE

HKEX/LSE

CME

Deutsche Börse

Nasdaq

Brasil Bolsa Balcão

CBOE Global Markets

Euronext

Singapore Exchange

ASX

The audacious proposal is

the latest salvo in the

consolidation of the

exchange industry

Chris Ratcliffe/Bloomberg

Bourses for courses

H E N RY SA N D E R S O N A N D N E I L H U M E

Hong Kong Exchanges nd Clearinga
already owns one venerable City of
London institution — theLondon Metal
Exchange.

In its only overseas acquisition to
date, HKEXbought he 142-year-oldt
exchange in 2012 for £1.4bn, justifying
the hefty price tag with the idea of the
LMEactingasabridgebetweenthewest
and China, thelargest consumer of
industrialmetals.
But seven yearson, the grand strategy
pursued by HKEX chief executive
CharlesLi asyettoberealised.h
China’s domestic commodity
exchanges have repeatedly blocked
attempts by the LME to break into the
mainlandmarket.
The LME, which has a global network
of 500 warehouses to store metals, still
has no sites in China.Its only access to
the country’s vast market is through a
small physical commodities exchange
in Shenzhen, which started trading
aluminainOctober2018.
Undeterred, Mr Li has welcomed a
steady stream of Communist party poli-
ticians to the exchange. In June, he
hosted vice-premierHu Chunhua, a
member of the elite politburo made up
oftheparty’s25topofficials.
Still, the LME remains theleading
venuefortradingmetalssuchascopper,
nickel and aluminium.Last year, it
posted pre-tax profit of $135m, off from
$154m the previous year, mainly owing

to higher staff and IT costs. However,

the LME still managed to pay a dividend

of$186mtoitsparent,upfrom$96.5m.

UnderHKEXownership,theLMEhas

cut fees on some of its most popular

trades to boost activity and build

bridges with its membership. But com-

petition is fierce and average daily trad-

ing in the year to date is down 4 per cent

atslightlymorethan620,000lots.

HKEX has also tried to bring a once-

staid City institution into the 21st cen-

tury,banningdrinkingatlunchtimeand

increasing scrutiny of the parties during

LME Week, the industry’s annual jam-

boreeinLondon.

All this has come at a cost, however.

HKEX has had to invest heavily in the

exchange as wide-ranging regulatory

reformscameintoforce.

It has also financed an upgrade of the

LME’s IT systems and the development

of a new clearing house as well as the

costs of a legal challenge to its ware-

housereforms.

On top of that, HKEX shifted the

LME’s headquarters — including its

famousopenoutcrytradingring—from

a drab building on Fenchurch Street

to a modern office overlooking the

grounds of London’s Honourable Artil-

leryCompany.

“They have got the balance about

right,” said one person close to the

exchange. “Charles and his manage-

ment team have supported investment

in a new clearing house, for example,

but haven’t dragged staff and functions

backtoHongKong.”

“Therehasn’tbeena‘Chinafication’of

theLME,”thepersonadded.

Even though Mr Li has not realised

his ambition of building a commodities

bridge between the west and China,

he has always defended the purchase of

theLME.

“When we bought the LME it was a

rare asset,” he said at the opening of

LMEWeekin2017.

“Allyouneedtothinkaboutisifthisis

the right asset for us. The rest is detail.

Youdon’tworryifthepriceisright.”

Financials

Li’s grand China strategy for LME unrealised

Mr Schwimmer’s

ambitious deal for

Refinitiv ught theca

company unawares

More on ft.com

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‘They have got the balance

about right... They have

not dragged staff and

functions back to HK’