£2bn hole in Hong Kong stock exchange bid

AN audacious swoop on the London Stock Exchange Group by its Hong Kong rival faces a setback after a shortfall of nearly £2billion emerged in the funding for the offer.

Hong Kong Exchanges and Clearing announced two weeks ago that it was considering a £29.6billion bid for the parent of the London exchange.

It said a firm offer, with an October 9 deadline, would include £7.3billion in cash and new shares in HKEC worth £22.3billion.

Analysts said that would require 884 million new shares being issued. But a slide in the share price since then has shaved £1.7 billion off the value of the bid.

It means Hong Kong exchange chief executive Charles Li, who has faced criticism over his plan which he launched as an alternative to the LSE’s proposed merger with financial data giant Refinitiv, may need to bolster his funding arrangements or dig deeper to find more cash.

One City source said it may be difficult to increase the cash element of the offer without going further into debt. He said the most likely route would be to issue more shares, but that could exacerbate a slide in the share price.

Another said: ‘The lower HKEX share price goes, the harder it will be to gain support for this from LSE investors and get it over the line.’

LSE shareholder Royal London Asset Management has already attacked the deal, in part because it is too reliant on paying for LSE with shares in the Hong Kong exchange owner.

Concerns that China is exerting growing influence over Hong Kong, sparking four months of violent protests, has been central to fears raised over the bid. Six of 13 board directors at HKEX are appointed by the Hong Kong government, which is also the biggest shareholder with 6 per cent.

It is understood that one proposal under consideration would dilute that perceived influence by adding existing LSE directors to the HKEX board. Li has also proposed a dual listing in London which would place the enlarged group under regulatory scrutiny in the capital.

Sources say Li is determined to push ahead. There is mounting speculation that any firm offer may be delivered alongside a searing critique of the LSE agreed buyout of Refinitiv from private equity firm Blackstone.

Rival companies including New York Stock Exchange owner ICE and Frankfurt-based Deutsche Börse Group, which has attempted to strike a similar deal with the LSE several times, will be watching developments closely.