Green light for mega-exchange merger in Australia

Sydney Futures Exchange shareholders vote in favour of a merger with the Australian Stock Exchange creating the ninth largest exchange in the world.
Against many odds, SFE Corp shareholders have approved a A$4.56 billion merger with the company's larger local peer the Australian Stock Exchange following a friendly takeover bid launched in March.

In a vote cast on Wednesday, 93% of shareholders backed the deal, when the board needed only 50% support to push the deal through.

The cash/scrip deal will deliver SFE investors a handsome capital return, with the ASX offering 0.51 ASX shares per SFE share. The deal values SFE shares at A$16.93 compared to a closing price on Wednesday of A$16.74.

Prior to the announcement of the merger SFE shares were trading around the A$14 mark.

Wednesday's victory hasn't come without a fight. Shareholders had threatened to vote down the deal unless the price was altered to reflect the SFEÆs near-term earnings prospects, or unless the management structure of the new entity was changed.

The ASX stood firm on its price but in June backed away from its original plan to retain Tony D'Aloisio as the chief executive officer of the ASX, and agreed to give the job to the current head of the SFE, Robert Elstone - who is more popular with investors.

There has also been resistance to the merger from the broker community on the grounds of anti-competition. Brokers fear that the merger will stifle competition in the derivatives markets and lead to higher trading fees.

These concerns were expressed to the Australian Consumer and Competition Commission but were dismissed when the ACCC gave the go-ahead for the takeover in May.

In 1999, the ACCC opposed a similar merger proposal because it said the two entities could become rivals given the imminent implementation of new legislation designed to stimulate competition.

But now that the legislation has been in place for some years, the ACCC thinks otherwise. In giving the green light to the deal, ACCC chairman Graeme Samuel, said: "The ACCC received no persuasive evidence that the current lack of competition between ASX and SFE was likely to change in the foreseeable future."

"Further, both local and overseas experience suggests that it is very difficult for exchanges to attract trade in financial products away from other exchanges."

But some brokers arenÆt convinced, claiming that the old arguments made in 1999 still apply. Other than a potential hike in fees, they are concerned that the merger will boost ASX's dominance of clearing and settlement through its CHESS share registry service.

In his pitch to SFE shareholders, ASX chairman Newman said the deal would be earnings per share positive by 2008.

ôWe expect to achieve gross pre-tax cost synergies for the merged group in the order of A$14 million to A$18 million in the 2007/2008 financial year,ö he told shareholders in the lead up to this weekÆs vote.

The ASX is particularly interested in pursuing the growth in exchange traded derivatives that the SFE is currently enjoying. In the four months to April this year, volume in these instruments increased by 24% to 24 million contracts.

The question now is will the new and improved ASX be on the look out for further regional opportunities, such as bringing the New Zealand Stock Exchange into the fold.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media