We could know as early as today if the ASX and the Singapore Exchange are to merge after a flurry of market activity and statements (and obvious briefings to business writers) on Friday.
There’s media talk about a 40% premium from the SGX.
It seems news of the talks leaked out and the shares in the ASX started rising in trading late Thursday and early Friday.
A statement in Singapore requesting a trading halt in the shares seems to have confirmed the speculation about a merger.
The two exchanges have discussed closer co-operation in the past, but it went nowhere, as did closer relations on common listings on both exchanges (Singapore Telecom, which controls Optus is the most obvious example). Its shares do not trade in big volumes.
The ASX mentioned an approaches several weeks ago, but it was not elaborated on by the company at its subsequent AGM.
That news came before ASX CEO Robert Elstone revealed plans to step down next year.
The ASX said in its statement on Friday afternoon ”A party has recently reactivated confidential discussions with ASX concerning a possible business combination,”
It added that it had observed a rise in its share price but did not yet have anything to disclose.
The Singapore Exchange halted trade in its shares within minutes of the ASX statement, ”pending an announcement”.
Both statements came around 3.30 pm Australian time, after ASX shares had jumped 86c to $34.96.
The Sydney Morning Herald said sources did not rule out the possibility of a takeover offer from the SGX should agreement on merger terms not be reached.
But a hostile bid would not succeed as it would alienate the ASX board and major shareholders and regulators, led by the federal government.
Foreign Investment Review Board approval is needed if the SGX buys more than 15% of the ASX.
A complicating factor is the level of Singapore Government control and involvement in the SAGX.
The larger Singapore exchange is valued at $S10.2 billion ($8 billion) compared with the ASX’s market value of more than $6 billion.
The Australian Financial Review’s Chanticleer column on Saturday explained that by looking at the execution costs for trading on both exchanges.
The cost on the SGX is 4.7 basis points, in Australia it is 0.65 points, or it’s seven times cheaper to trade in Australia than in Singapore (where the economy and the financial markets are heavily controlled by the government through the Monetary Authority of Singapore).
So will the two exchanges merge (and lower costs in Singapore, which the government might not want), or will they maintain two trading platforms (based on common technology) as is the current situation. (So what’s the rationale for the merger then?)
The Singapore Exchange’s monopoly profits are represented by its price earnings ratio of 30 times; Australia’s is 17 times.
Singapore trading volumes are down 40% this year, while Australia’s are down only a few per cent, thanks to the drive to demand for Australian resource shares from China’s economic boom and rising commodity prices (and the rising value of the Australian dollar and higher interest rates).
With the higher PE, Singapore will no doubt offer shares, but it will have to include a cash alternative or as part of a cash and shares offer.
The speculation about a possible takeover has seen ASX shares rise to six-month highs.
There has been speculation that an electronic exchange called Chi-X will enter Australia next March (it has Australian government approval to do that).
But the new global head of Chi-X (Nomura controls it) has recently called a halt to new expansions while he looks at the financial impact.
It’s not clear if the move into Australia is covered by this review.
If it is, it could see the ASX left alone, meaning we could have one monopoly based in Singapore, taking over another in Australia and the most likely competitor to both left on the sidelines.
This deal is all about two regional exchanges making themselves bigger as global exchanges consolidate and these electronic trading platforms grow in importance.
It won’t help Australians buy more foreign charges. If they are not interested now, a merger like this won’t change that attitude overnight.
