Exchange, list thyself!

The SGX plans a simultaneous placement and IPO of its shares. Brokers grumble.

The Singapore Exchange (SGX) has announced plans to do a combined private placement and initial public offer of its shares before the end of the year. The company has called an extraordinary general meeting of its shareholders for November 1 to vote on the plan. 

The plan calls for changes to be made to the SGX's articles of association to comply with the requirements for listed companies in Singapore. Shareholders will also vote to approve a capital restructuring that will consist of a 100:1 split of the share capital as well as a rights issue of shares to existing shareholders.

The move is the final step in the demutualization of SGX. The company was formed after the merger of the old Stock Exchange of Singapore and Simex - the local derivatives exchange. The shareholders of SGX are the old members of the two exchanges. 


The plan has already caused some controversy. Originally, the SGX was to proceed with a private placement before doing its IPO. This would have increased the value of the company before the IPO, allowing shareholders to receive a much higher valuation of their holdings at the IPO than if the private placement and IPO were done simultaneously. 

It is unclear who SGX plans to place its shares with. On the company's website the exchange says it plans to "make available [shares] to international strategic investors who are committed to the Singapore Exchange's business and long term interests." 

The hotly tipped candidate to buy into such a placement is the Australian Exchange (ASX), which already has strong technological and trading links with the SGX. However, the newly corporatized and listed Hong Kong Exchanges and Clearing (HKEx) remains a possible candidate to buy into SGX given the synergies between the two exchanges - although there are also strong rivalries between the two.

There is further uncertainly surrounding the valuation of the company. Under the Exchanges (Demutualization and Mergers) Act 1999 which was passed by the Singapore Parliament in August last year, the current shareholders are guaranteed to receive shares with an aggregate value of S$308 million. However, this amount will be the same if the current shareholders own 100% of the company or 10%. Therefore the percentage of SGX that is being placed and sold to the public will determine the overall value of the company at the IPO.

On the SGX website, the company explains this position under the heading, 'Singapore Exchange's Shareholders:'

"Currently, SGX's majority shareholders are the former members of SES and SIMEX. However, in due course upon placement of shares to other investors, pursuant to the Exchanges (Demutualisation and Merger) Act 1999, the previous SES and SIMEX shareholders are expected to collectively hold between 35-50% of the total paid-up capital in the new Singapore Exchange. The Exchange plans to make available the other 50-65% to international strategic investors who are committed to the Singapore Exchange's business and long term interests."

Therefore if SGX places and successfully sells the full 65% of the company to new shareholders and the existing shareholders own a collective 35% stake worth S$308 million, the full value of SGX at listing will be over S$1 billion. The kicker - from an investors point of view - is how much of the exchange gets sold and placed.

The timing of the deal has also caused some eyebrows to be raised. Now could a difficult time for the SGX to attempt such an ambitious transaction. Stocks in Singapore have been badly burnt this year and local trading volumes are thin. As the exchange gets its revenue from a combination of trading volume and fees from new listings and fees generated from the overall value of the listed stocks, weakness in the market could bode ill for the offering of the exchange itself. As one owner of a local brokerage sighed to "Now is not a good time to do it. The market is down. But we are all shareholders of the SGX by default."

Nevertheless, shareholders should be buoyed by the run away success of the listing of HKEx in June this year. The company started trading at a low of HK$3.99 on June 26 and by August had reached a high of HK$17.25. It has since slipped back and the stock closed at HK$15.50 on October 10. That has provided investors with a 288% gain on the first day's close, making it one of the best performing stocks on the Hong Kong market this year. Shareholders in SGX must hope for a similar performance.

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