LSE board poised to decide fate of Hong Kong exchange’s $39bn offer

The London Stock Exchange’s (LSE) board will meet in coming days to make a decision on the Hong Kong bourse’s surprise $39 billion takeover proposal, a source close to the British company said on Thursday, as the market poured cold water on the deal.

The unsolicited takeover offer is not expected to succeed given a preference among LSE investors for the exchange to complete its $27 billion proposed acquisition of data and analytics group Refinitiv, the source close to the LSE said.

The exchange wants to focus on executing that deal, rather than risk it being derailed by the Hong Kong bourse, the source said. Hong Kong Exchanges and Clearing’s offer requires the LSE to ditch the Refinitiv deal.

But a person close to the Hong Kong exchange said a rejection of an initial approach was common in takeovers and HKEX was already considering its next step.

Informal discussions between HKEX and LSE shareholders have begun, the person added.

An LSE spokeswoman declined to comment.

The proposed deal, announced on Wednesday, aims to create an exchange powerhouse spanning Asia and Europe which would be better able to compete with U.S. rivals such as Intercontinental Exchange Inc and CME Group inc.

However shares in HKEX fell more than 3% on Thursday as investors raised concerns about the political and regulatory risks involved in its move to take over one of Britain’s marquee financial institutions.

The UK government said authorities would examine the proposed deal closely as the LSE was a “critically important part” of the British financial system.

However a takeover could face regulatory scrutiny beyond British shores; the London bourse also owns the Milan exchange and has a significant American presence through its FTSE Russell index subsidiary and LCH, its derivatives clearing house which dominates the U.S. dollar swap market.

This means a deal could also draw the attention of watchdogs in Italy and the United States, which is locked in a trade war with China.

HKEX declined to comment.

The Hong Kong exchange’s indicative offer for the LSE also received a cool reception in London, where LSE shares finished up 5.9% on Wednesday, far short of the proposed takeover’s implied premium.

Daunting political and technical challenges to the deal have already surfaced.

One major sticking point is the requirement for the LSE to abandon its acquisition of financial information provider Refinitiv from U.S. private equity firm Blackstone and Thomson Reuters, the parent of Reuters News.

That deal, which went public in late July, caused LSE’s shares to leap 15% on hopes Refinitiv’s business would boost its long-term profitability. LSE said in a statement on Wednesday that it remained committed to the Refinitiv deal.

HKEX has 28 days to make a firm bid for the LSE, whose shares closed up nearly 1% at 7,274 pence on Thursday, or walk away for six months.

The source close to the LSE said that while the Hong Kong deal offered a gateway into China’s economy, the LSE had already just established its own entry point with a recently launched stock market link with Shanghai.

A separate source close to the LSE said HKEX executives met with LSE Chief Executive David Schwimmer in London on Monday, just two days before they made the proposal public.