Australia’s ASX Limited and Singapore Exchange (SGX) said yesterday in a joint statement that they will merge. The announcement followed news leaked on Friday last week that a deal was imminent.
Magnus Böcker, SGX’s chief executive, seems to be the driving force behind the transaction, which is made up of a mixture of cash and scrip, according to bankers. It will create the second biggest stock exchange in Asia behind Hong Kong Exchanges & Clearing (HKEx), and the fifth largest in the world, as measured by the market capitalisation of the exchanges’ listed entities. On October 22, the pro forma market capitalisation of the new entity was $12.3 billion. Both stocks were suspended from trading on Friday following the leaks of the deal.
“The combination leverages the strengths of ASX through its listings, stock options and fixed-income franchises, with SGX, the Asian gateway for international listings, equity futures and OTC clearing, to create the region’s pre-eminent exchange group,” said the statement.
The agreed merger is in response to increasing competition from alternative trading venues and the demands of high-frequency traders in the region.
The transaction is unanimously recommended by the boards of directors of both the ASX and SGX. Morgan Stanley is acting as financial adviser to SGX and UBS is advising ASX.
ASX-SGX Limited will be the holding company of the combined group and will be listed on both the Singaporean and Australian exchanges. Subject to regulatory approval, it will have an international board comprising 15 directors from five countries, including four directors drawn from ASX.
Chew Choon Seng, currently the chairman-elect of SGX, is likely to become the non-executive chairman of the combined group, and Magnus Böcker is to become its chief executive officer.
Böcker is a former head of OMX, the operator of exchanges in the Nordic region, and was a key figure in its acquisition by Nasdaq of the US.
Separately, SGX agreed on Friday an arrangement with Nasdaq OMX to offer companies opportunities for listing on both exchanges. Both SGX and ASX already share the same trading platform, provided by Nasdaq OMX.
ASX-SGX Limited would have pro forma revenues of about $1.1 billion and pro forma earnings before interest and income tax of approximately $700 million, based on the audited financial statements of the two exchanges, each for the financial year ended June 30, 2010.
ASX shareholders will be paid a mixture of A$22.00 (S$28.04) in cash and 3.473 new ordinary SGX shares for each existing ASX ordinary share. Based on SGX’s closing price of S$9.54 last Thursday and using the exchange rate of S$1=A$0.7847, this values ASX at S$10.7 billion (A$8.4 billion or $8.2 billion) or A$48.00 per ASX share.
That represents a premium of 37.3% to the last traded price of ASX shares on October 22, 2010, and a premium of 47% to the three-month volume-weighted average price of ASX shares.
The transaction is also expected to create value for SGX shareholders and to be accretive to SGX’s earnings per share by approximately 20%, based on the FY2010 pro forma financial results and before taking into account estimated cost synergies. SGX expects that its shareholders should be able to enjoy higher absolute dividends in the medium term with a minimum dividend payout ratio of 70% of net profit after tax for the combined group.
The combined businesses have a price-to-earnings ratio (P/E) of 20 times, according to bankers familiar with the deal. HKEx trades at a higher multiple, but US and European bourses typically trade at much lower P/Es, ranging from eight to 10 times earnings.
Shares of ASX rose more than 20% yesterday, and those of SGX fell only 5%, suggesting that investor sentiment is generally favourable.
ASX and SGX will remain separate legal and locally regulated entities, and will maintain their existing brands.
Pre-tax cost synergies and other transaction-related cost savings – made up of IT and non-IT related savings – are estimated by the bankers to be $30 million annually based on existing cost structures. Less tangible benefits should accrue through the greater prominence of the exchanges, encouraging dual listings, new products and services, and by attracting new investors.
It is hoped that the combination will diversify the product and customer bases of the two exchanges and create cross-access opportunities for market participant firms. Listed companies will benefit from the increased profile of the listing platform among the global investing community and be able to benefit from an enlarged liquidity pool of investable funds.
Together ASX and SGX will provide access to the second largest listing venue in Asia-Pacific with over 2,700 listed companies from more than 20 countries, including over 200 listings from Greater China. It will be especially strong in the resources, Reit and ETF (exchange-traded funds) sectors, and offer the widest range of Asia-Pacific equity, fixed-income and commodity derivatives in the region.
The deal should close in April 2011, according to bankers. It is subject to various regulatory approvals, including from the Australian Securities and Investments Commission and the Monetary Authority of Singapore. Shareholders of both exchanges are expected to support the merger.
SGX has secured financing through an 18-month bridge facility, with an availability period of up to 10 months, arranged by Australia and New Zealand Banking Group Limited and Deutsche Bank. It plans to replace that short-term facility with a longer-term loan.