Singapore Exchange Bid Multiples Value ASX Below Bigger Bourse Takeovers

Singapore Exchange Ltd.’s takeover of the main Australian stock market, which received instant disapproval from lawmakers, may gain investor support as ASX Ltd. gets a 42 percent premium and owners of the bidder pay no more than the average of comparable deals.

Singapore Exchange Chief Executive Officer Magnus Bocker faced a revolt from his own shareholders on Oct. 25 when he unveiled the $8.4 billion agreement to acquire ASX at twice the average premium for financial services acquisitions in the past year. The takeover won’t compromise market regulation, Malcolm Starr, ASX’s head of regulatory policy said today in response to a report in the Age newspaper that said the country’s Financial Services Council is concerned the deal may reduce the fairness of listing rules.

Now, Tokyo Stock Exchange, with a 4.9 percent stake in the Singapore bourse, is dropping its criticism, citing growth prospects for the combined company. The bid values the Sydney- based Australian company at 19.5 times earnings before interest and taxes, compared with the 22.8 times earnings before interest and taxes NYSE Group Inc. paid for Euronext NV in 2007 and the 21.4 times EBIT that CME Group Inc. valued Nymex Holdings Inc. at a year later, data compiled by Bloomberg show.

“On the face of it, it looks like a pretty juicy multiple that SGX is paying,” said Chris Hall, who helps manage $3.7 billion at Argo Investments Ltd. in Adelaide, Australia, in a telephone interview. “But if you look at some of the other global deals on exchanges, on a raw valuations basis they’re at the same sort of level.”

Nasdaq’s OMX Takeover

Singapore Exchange offered A$48 per ASX share in cash and stock, compared with the Australian company’s price of A$34.96 at the last close of trade before the agreement was announced. The premium is almost twice the average level of 21 percent for financial companies in the past year, according to data compiled by Bloomberg.

Rising competition from electronic venues and investor demands to cut trading costs have driven acquisitions among global exchanges since January 2007, including Nasdaq Stock Market Inc.’s takeover of OMX AB, which Bocker helped arrange as the Stockholm-based operator’s CEO. That deal was proposed at 10.2 times EBIT, less than half the 22.8 times median offered in comparable exchange deals globally, according to Bloomberg data. The Chicago Mercantile Exchange proposed paying 39.2 times EBIT to buy the Chicago Board of Trade in 2006.

Valuation Concern

“A lot of the exchange deals were done four to five years ago at very high multiples with the idea that they will be able to boost their margins and grow their volumes,” said Larry Tabb, founder and chief executive officer of Westborough, Massachusetts-based research firm Tabb Group LLC. “These firms haven’t been able to rationalize their technology fast enough and competition has intensified. Trading volumes have also faltered since the global financial crisis.”

Bocker’s proposal was questioned a day after it was announced by the Tokyo exchange’s president, Atsushi Saito, who said the issuance of new shares would reduce the value of his company’s stake.

“It’s not a good story,” Saito told reporters on Oct. 26. “Our shareholdings will be diluted, with our stake falling to around 3.1 percent. It’s possible we’ll have a loss of hundreds of millions of yen.”

This week, TSE spokesman Naoya Takahashi said by telephone that Atsushi never opposed the plan, and that the combined company’s growth may limit losses from the merger.

The Australian Competition & Consumer Commission is reviewing the bid, it said Nov. 10. The bid also faces scrutiny from the Foreign Investment Review Board, the Reserve Bank of Australia and the Australian Securities and Investments Commission, Treasurer Wayne Swan said on Oct 27.

Earnings Multiples

“There is absolutely no tweaking necessary to leave the Australian government completely in control of regulating how someone in Australia that it licenses conducts its business,” the ASX’s Starr said in a telephone interview today.

SGX’s shares fell 6.2 percent, the most in two years, the day the merger was announced. They have since added 1.1 percent. ASX shares jumped 19 percent the day of the announcement but have since retreated 11 percent as opposition from Australian lawmakers, who must approve the deal, mounted.

The offer propelled ASX’s valuation from a one-year low of 14.8 times annual earnings to as high as 21.9 times just after the announcement. The stock trades for 19.4 times yearly profits now, compared with an average of 18 for companies in Australia’s S&P/ASX 200 Index, data compiled by Bloomberg show.

Singapore Exchange Shares

Singapore Exchange has seen its earnings multiple fall from 35.9 on Oct. 15, the highest since 2007, to 32.1 as of yesterday. Companies in the Straits Times Index command an average price- earnings multiple of 13.2, data compiled by Bloomberg show.

“This is a good deal from an outright perspective in the sense that ASX is trading cheaply by historical standards,” George Boubouras, head of investment strategy at UBS AG’s Australian wealth-management unit, said in an interview by telephone. “If SGX can from a cash perspective make it work hard, they can deliver earnings growth to their shareholders going forward. That’s the point of it.”

Australian lawmakers including two Greens party members, opposition treasury spokesman Joe Hockey and two independents said they oppose Singapore Exchange’s bid, saying it’s unlikely to be in the best interests of Australians.

Prime Minister Julia Gillard’s Labor government doesn’t hold a majority in the lower house as the result of an election on Aug. 21 that delivered the closest result in 70 years. It needs the votes of the Greens and two independent lawmakers to pass legislation.

ASX’s Chief Executive Robert Elstone said at a media briefing announcing the takeover that the merger was in the interests of both countries, and that the companies are confident that they’ll win regulators’ approval.

To contact the reporters on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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