Stock: ASX Limited
Stock code: ASX
Share Price: $36.75 (as at Friday 4th March, 2011)
Broker buys: Shadforth Financial Group (21/2/2011, share price was $38.50 that day)
Broker holds: RBS Morgans (21/2/2011, share price was $38.50 that day), Novus Capital (8/11/2010, share price was $36.80 that day)
Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO)
Merger Mania Wave of Consolidation sweeps through Global Exchanges
Until recently, talk of one big global market has been just that, talk. That all changed last October when the Singapore Exchange (SGX) announced its intention to buy the Australian Securities Exchange (ASX) in a deal valued at $7.9 billion. The deal has come under intense scrutiny by Australian lawmakers since its announcement.
On 9 February, the pressure on exchanges across the globe was turned up when the London Stock Exchange (LSE) said it was buying TMX Group, owner of the Toronto stock exchange. Later that same day, Deutsche Börse announced that it was in talks to buy NYSE-Euronext.
The big question for investors is: will Australian politicians allow the ASX to compete internationally with other mega-exchanges? And will the ASX’s competiveness diminish if politicians decide against the merger?
What will happen to the share price of the ASX if the merger fails?
ASX limited (ASX) is the major stock exchange group in Australia. The ASX’s primary business is as a market operator, clearing house and payments system facilitator.
The ASX Group was created by the merger of the Australian Stock Exchange and the Sydney Futures Exchange in July 2006. Products and services offered by the ASX include shares trading, futures, exchange traded options, warrants, contracts for difference, real estate investment trusts, listed investment companies, interest rate securities and exchange traded funds.
The ASX announced in its latest financial report that its underlying net profit after tax was $175.5 million, up 2.9 per cent over the previous comparable period. Net profit for the six months to Dec. 31, including charges, rose to $172 million from $168m the prior year. Operating revenue excluding interest and dividends was $306.4 million, up 1.2 per cent. The result beat analyst forecasts which ranged from $162m to $172.2m.
SGX is currently trading at 17.56 X forward earnings and has a market cap of 6.59B.
Last October, SGX announced the $7.9-billion offer for all the shares of ASX in a deal that would create the world’s fifth largest listed exchange operator at the time of the announcement. The SGX-ASX combination would give investors access to a $1.9 trillion marketplace. The newly created entity would pose a competitive threat to the major Asian exchanges in Hong Kong and Tokyo.
SGX’s bid is made up of $22 in cash plus 3.473 SGX shares for each ASX share. Implied value of $48 per ASX share. ASX shareholders would own 36 per cent of the combined group, with Singapore Exchange shareholders holding 64 per cent. The SGX’s proposed takeover of the ASX values the Australian bourse at $8.4 billion. This was a 37.3 per cent premium of the closing price of ASX shares on October 22, 2010.
In an attempt to overcome political opposition in Australia, the two exchanges announced changes to the proposed merger, including having an equal number of Australian and Singaporean directors; maintaining operations, assets and key staff in Australia; and investing in new products and services in Australia and Singapore.
In spite of recent changes to the deal there is still strong political opposition in Australia.
The biggest hurdle for the SGX-ASX marriage is the approval of the Australian government in respect of the 15 per cent foreign ownership limit outlined in the Corporations Act. The 15 per cent cap on foreign investment must be waived by Treasurer Wayne Swan. The deal also needs approval from the Australian Securities Investments Commission which acts as the corporate regulator. Because the ASX is subject to legislation imposing an ownership limit, the proposed merger would require a regulation change that could be disallowed in the Senate.
To complicate matters further the Monetary Authority of Singapore’s has a 23 per cent stake in SGX. This 23 per cent stake of the Singapore government in the exchange means the Australian Foreign Investment Review Board (FIRB) will have to apply more stringent tests to the deal.
The Australian Securities and Investments Commission (ASIC), the Australian Foreign Investment Review Board (FIRB) and the Monetary Authority of Singapore must also approve the merger.
Global wave of Consolidation
Traditional exchanges are under intense cost pressure from upstart electronic rivals like Bats Europe, Chi-X Europe and Direct Edge which were set up by the world’s largest investment banks to loosen the big bourses’ grip on share trading. In order to combat lost market share and shrinking margins, larger exchanges are being forced to merge.
Deutsche Boerse and NYSE Euronext’s plan to create the world’s largest stock and futures exchange has sent competitors around the world scurrying to find partners, accelerating an industry shake up. Just recently, four Southeast Asian exchanges-Singapore Exchange, Bursa Malaysia Bhd., the Philippine Stock Exchange and the Stock Exchange of Thailand-announced a plan to develop a trading link by the end of 2011 that would enable investors to buy and sell shares in any of them while settling transactions in their own market.
Not to be left out of the party, NASDAQ OMX Group Inc announced that is exploring options such as teaming up with a partner on a rival bid for NYSE Euronext. Possible partners to entice the NYSE Euronext out of its deal with Deutsche Boerse are the Intercontinental Exchange Inc or CME Group.
Chris Elliott of Shadforth Financial Group, who has buy recommendation on ASX believes that “together with renewed investor confidence in the mining sector this year and a potential merger with the Singapore Stock Exchange, and the ASX offers a good yield and capital upside.’ Elliott points out that the stock was trading at $36.75 on March 4, 2011, which is ‘well below the takeover price of $48.”
LSE a threat?
Some investors may regard the recent merger activity as strengthening the case for the SGX-ASX marriage – providing the impetus to overcome the major political and regulatory hurdles in Australia. Others see the latest round of mergers as a threat to the ASX deal, with the LSE now seen as an alternative partner for the SGX.
The market is currently pricing in a 40 per cent probability of the deal going through, down from a 50 per cent probability the market priced in after SGX and ASG announced changes to the proposed board structures of the combined company.
The LSE’s proposed purchase of the Toronto stock market clearly signifies its intention to become the major player in the mining-resources arena. The combined company would make it the world’s fourth largest and a top centre for growth sectors of mining and energy. Given that Asia is in general very resource-hungry; a link up with LSE would make sense for the SGX.
Unfortunately for ASX shareholders, recent price action would imply that the market is losing confidence that a deal will be completed between the SGX and the ASX.
As exchanges around the world face increasing global competitive pressures it is not difficult to see why spurts of consolidation have taken place over the past few years. Exchanges need to diversify their products and regional foothold, and must build scale to compete successfully.
As more exchanges join forces, ASX shareholders are likely to be rewarded for holding on regardless of the outcome of its SGX-ASX proposed merger.
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