Singapore has taken its ambitious push to become Asia’s investment “gateway” to a whole new level, with a deal by SGX, the main Singapore exchange, to buy Australia’s ASX for A$8.4bn ($8.3bn).
Analysts see the deal as logical and timely, telling the FT that while both exchanges are profitable, neither can grow much beyond their domestic markets by staying independent. Lex meanwhile notes that the two are a ‘decent fit” — particularly as alternative trading venues steadily encroach on the business of the more traditional exchanges.
Interestingly, Australia’s stock market is worth about $1,360bn, compared with Singapore’s $558.2bn, according to Bloomberg. Even so, SGX is the larger company, with a market value of about $7.86bn compared with ASX’s $6bn based on October 22 prices.
“Strategically long-term, in terms of surviving in the Asian market, they have both got to do a deal”, Niki Beattie of UK-based consultants The Market Structure Practice told the FT. “And they are probably the least contentious partners for each other.”
But, it seems, investors in SGX are not happy with the proposed deal, at least, they weren’t on Monday as they drove down SGX’s shares by nearly 7 per cent before the stock recovered slightly to close down nearly 5 per cent.
One concern was whether the deal would receive the necessary approval from Australian regulators. However, Graeme Samuel, head of Australia’s key competition regulator, the ACCC, effectively gave a green light to the deal on Monday, saying it was “a matter between” the two exchanges and noting: “I can’t see that raising competition issues for us”.
But some (Australian) commentators lamented the implications for Australia’s once high hopes to become an Asian investment hub.
As the Sydney Morning Herald’s Michael Pascoe wrote on Monday:
It’s not the greatest advertisement for the recovery of Australian equities when the stock exchange itself is happy to be sold for what it was worth back in early 2007. And it says even less about Sydney becoming a regional finance centre when our equity market becomes a branch office of Singapore Inc.
He continues:
ASX, despite a domestic base nearly five times that of Singapore, had already lost any hope it might have had of regional leadership. SGX’s strength is in international listings – Australia has remained consumed with its own backyard.
If the takeover is completed, the Australian stock market will ultimately be controlled by Singapore’s central bank in another example of the island state’s guided capitalism with its long-term goals and patience.
As the FT reported, the deal if successful would create Asia’s second-largest exchange group by the market cap of the two bourses as listed entities, highlighting consolidation pressures amid the growth of electronic trading… (Tokyo’s TSE is still the largest by total market cap although Shanghai on some days surpasses it).
Under their agreement, SGX would buy the Australian exchange via a scheme of arrangement using a mix of cash and shares. It would pay A$22 cash and 3.473 new SGX shares for each ASX share, valuing the ASX at A$8.4bn or A$48 a share — a 37 per cent premium to Friday’s closing price.
While investors punished SGX, shares in ASX rose as much as 25 per cent to A$43.89 on Monday after a temporary trading halt earlier in the day.
A key winner in any deal would be Magnus Böcker, SGX chief executive who joined the bourse last year from his post as head of OMX, the Nordic exchange operator. He has made no secret of his aim to turn the SGX into a dominant exchange operator in Asia.
If the SGX-ASX deal is approved by shareholders and regulators, he is expected to be named chief executive of a new holding company.
On Friday, SGX agreed a deal with Nasdaq OMX to offer companies opportunities for listing on both exchanges. Among other initiatives by Bocker, Bloomberg notes, SGX on October 22 started trading 19 American depositary receipts of Asian companies to boost trading volumes.
In June, the bourse said it would invest S$250m in a new trading system that it claimed would be the world’s fastest when it goes live in 2011. The following month, SGX and the London Metal Exchange agreed to jointly introduce cash-settled metals futures contracts by the 2011 first quarter.
All the while, competition is increasing within the Asian region. For one thing, Chi-X Global – part-owner of Europe’s larest alternative equity trading group – has won preliminary approval to become a competitor to ASX, ironically following a deal in August last year between SGX and Chi-X Global to start the first exchange-backed dark pool in Asia.
Hong Kong meanwhile is scooping up the lion’s share of IPOs, with companies raising $37bn in initial stock sales there this year – almost seven times the total for the Singapore and Australia exchanges combined, according to Bloomberg.
As for ASX, it has been revamping its trading systems and fee schedules to deal with competition from alternative platforms and to attract high-frequency traders that are now moving into Asia.
The last word here however should perhaps go to the cheeky Asian financial blog Temasek Hedge, which sees other motives behind SGX’s latest deal, noting on Monday:
In a move that’s guaranteed to enrich SGX management, ASX shareholders and M&A lawyers/underwriters (but not much anyone else), SGX buys ASX (pending regulatory approval) for US$8.3 billion, a 37% premium to ASX’s last trade. Of course, the market – which sent SGX shares tanking from the announcement – actually understands that buying another company in a Mature Low Growth Market (i.e. Not a MILF) to realize 0.3% in cost savings is kinda like Singapore buying Perth to gain access to really fresh seafood, given that there are probably cheaper and simpler ways to reduce US$30 million – eg by ridding itself of payrolls for the entire (redundant) regulatory arm of SGX, since SGX’s overriding concern now is to let a million HFT pico-roses bloom. (Especially since none of the HFT algos will EVER need lunch breaks.)
Related links:
John Durie: Old ASX members sit on a gold mine – The Australian
Singapore in $8.4bn ASX takeover – SMH