Tuesday June 19, 2012
HKEx takes a beating
Investors concerned over the US$2.2bil the exchange is paying for LME
HONG KONG: Investor concern that Hong Kong Exchanges and Clearing Ltd (HKEx), operator of Asia's largest bourse, is overpaying with its US$2.2bil buy of the London Metal Exchange (LME) knocked its shares down by the most in two weeks.
In the first session since the acquisition was announced late on Friday, HKEx shares fell 4.5% yesterday to their lowest close since June 8. The Hang Seng Index rose 1%.
HKEx, the world's second biggest bourse by market value, is paying 58 times LME's adjusted 2011 earnings to get access to the commodities trading platform, which it sees as key for fuelling future growth as the pace of initial puclic offerings (IPOs) slows. This compares with a price/earnings (PE) average of 37.4 for similar deals in the past, according to Credit Suisse estimates.
The LME made a net profit of just £7.7mil last year due to its constrained-profit model.
“The question is: Have you seen a successful merger of exchanges before. I haven't. Not to mention at 58 times FY11 PE ratio (paid),” said one HKEx shareholder, who declined to be identified because of the sensitivity of the issue.
Some US$66bil worth of attempted stock exchange deals since 2000 were either pulled or blocked by regulators, according to Thomson Reuters data. Several deals were launched over the past two years, including Deutsche Boerse's planned purchase of NYSE Euronext, and Singapore Exchange Ltd's bid for Australia's ASX Ltd, both of which were turned down by regulators.
HKEx sat out of that consolidation wave, focusing instead on forging non-equity alliances with neighbouring stock markets in China. Its acquisition of LME, the world's biggest marketplace for industrial metals, is backed by the LME board but still needs the approval of LME shareholders and UK regulators.
The 135-year-old LME will help HKEx be less reliant on the securities trading that brings in about 53% of its revenue. The acquisition will also help LME extend its global reach by setting up warehouses in China, which consumes about 42% of the world's base metals.
While the deal makes strategic sense, it comes at a time when several global companies have shied away from making big merger and acquisition (M&A) bets due to the eurozone debt crisis and signs of a slowing global economy.
“We think the exchange overpaid for a business it has very little experience running,” said Edmond Law, an analyst at UOB Kay Hian in Hong Kong.
“The execution risk on this deal is very high, and returns may only come in the very long term.”
Other analysts including those from Credit Suisse, Merrill Lynch, CLSA and Macquarie maintained their “underperform” or “cut” ratings on HKEx, with Merrill saying the high price paid for the LME would make delivering attractive returns difficult. - Reuters