Australia plans to reject Singapore Exchange Ltd's proposed $7.8 billion bid for Australia's ASX Ltd on national interest grounds, underscoring the political challenges other major cross-border exchange deals are facing.
The two exchange operators wanted to team up to cut costs, fight growing pressure from alternative trading platforms and avoid being left behind as rivals in North America and Europe get together.
But Australian Treasurer Wayne Swan, facing growing political opposition to the deal, said on Tuesday he intended to reject the bid after getting advice from the country's Foreign Investment Review Board.
FIRB informed SGX that I had serious concerns about the proposal and that, subject to further consideration, I intended to accept the unanimous FIRB advice that the takeover would not be in the national interest, Swan said.
A final decision had not been made, he added, but share moves showed the market doubted the deal could be saved. ASX shares closed down 3.3 percent, while SGX shares rose more than 6 percent before closing 4.5 percent higher.
If the deal does fail, it will be the latest in a number of cross-border transactions to fall foul of politicians, including BHP Billiton's $39 billion bid for Canada's Potash Corp last year. It could also bode ill for other major exchange deals awaiting approval from regulators and politicians.
Last week, Nasdaq OMX and IntercontinentalExchange bid $11.3 billion for NYSE Euronext in an effort to trump Deutsche Boerse's deal, and pushed their case with an appeal to U.S. patriotism.
London Stock Exchange's bid to buy Toronto Stock Exchange operator TMX Group needs to overcome growing opposition from banks and the government of Ontario, the home province of the Toronto bourse.
Governments are getting pretty tough on lots of things, said Jason Beddow, Chief Executive at Argo Investments. I wouldn't say governments are particularly business-friendly at the moment.
In Australia and elsewhere, opponents have argued that exchanges are crucial national institutions that should be controlled locally. Other major regional bourses including Hong Kong Exchanges and Clearing <0388.HK> have caps on ownership which prevent takeovers.
The ASX bid, code-named Avatar by SGX's bankers, followed years of informal talks between the two exchanges and other operators on potential tie-ups. SGX-ASX would have created the world's fifth largest exchange in terms of the market capitalization of the operators.
SGX hadn't decided whether to drop its bid or pursue further dialogue with the FIRB, but the deal was not dead yet, two sources familiar with the transaction told Reuters.
We will continue to pursue organic as well as other strategic growth opportunities, including further dialogue with ASX on other forms of cooperation, SGX said in a statement.
Analysts said SGX could tie-up with another global exchange if its ASX bid failed.
A bid for SGX from Western exchanges cannot be ruled out as they lack the all important Asian footprint, Jaj Singh, a UBS analyst in Singapore, said before Swan's announcement.
But SGX's higher valuations would be a challenge as European exchanges are trading at an average of 11.1 times 2012 earnings and American exchanges at 13.3 times versus SGX's 19 times, UBS estimated in a note last week.
Mark Mobius, executive chairman of Templeton Emerging Markets, suggested SGX could do something with the Hong Kong exchange, Asia's largest listed bourse and a gateway for investors into China.
A combination of these two would be dynamite, he said.
TOO MANY HURDLES
Investors said political hurdles of a SGX-ASX deal were unlikely to be met without radically changing the bid.
Everybody else across the world seems open to (exchange consolidation) except Australia, said Mark Daniels, head of equities at Aberdeen Asset Management, which owns ASX shares.
I don't know why it should be rejected on national interest. ASX and SGX will certainly be disappointed ... Having said that, the ASX is a very well run company, that is the consolation here.
Rejection of the deal would give credence to
Australia's reputation as a sometime fickle recipient of foreign capital and could raise its sovereign risk profile - something the nation can ill afford given it runs a chronic current-account deficit and needs foreign capital to develop its huge resources sector.
Swan did not elaborate on his concerns about the bid, but the chief concern expressed by many opponents was the Singapore government's indirect 23 percent stake in SGX.
The FIRB assesses deals on six criteria including the independence of the foreign investor from its government, national security, competition and the economic impact.
The deal would have needed the approval of Australia's parliament to lift a 15 percent foreign ownership cap on ASX. Australia's minority government only holds power with the support of Greens and independents.
The collapse of the deal would be a blow to SGX chief executive Magnus Bocker, a 49-year-old Swede who made his mark bringing together seven Nordic bourses to form OMX AB.
It would also be a blow to advisers involved in the deal. UBS stood to make $23.4 million in estimated fees as the target adviser, while Morgan Stanley as SGX's adviser stood to make an estimated $21.4 million, according to Freeman Consulting Services, a Thomson Reuters joint venture partner.
(Additional reporting by Rob Taylor in Canberra and Sonali Paul in Melbourne and Rachel Armstrong in Singapore; Writing by Lincoln Feast; Editing by Dean Yates)