No One's Making Money on Exchange Takeovers an Arbitrage Too Far: Real M&A

Since Singapore Exchange Ltd. (SGX) said it will pay $8.3 billion for ASX Ltd. (ASX), London Stock Exchange Group Plc (LSE) agreed to acquire TMX Group Inc. (X) for $3.1 billion, and Deutsche Boerse AG (DB1) struck a $9.5 billion deal for NYSE Euronext, no one has been reaching for the checkbook on the assumption the deals will get done anytime soon.

ASX, operator of Australia’s national bourse, fell 21 percent below Singapore Exchange’s offer, the biggest gap this year, according to data compiled by Bloomberg. The difference between Toronto-based TMX’s price and LSE’s bid approached a record this week, while shares of NYSE Euronext have dropped more relative to Deutsche Boerse’s offer than ever before.

More than $20 billion of exchange acquisitions have been announced in the past five months as venues in North America, Europe and Asia try to cut costs and offset declining profits from equity trading with options, futures and derivatives. Now, with Singapore Exchange and LSE facing scrutiny from Australian and Canadian regulators and speculation of a competing bid for NYSE Euronext (NYX) diminishing, arbitragers have less incentive to maintain bullish bets, according to WallachBeth Capital LLC.

“Reality is beginning to set in,” said Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital. “None of these are going to get done quickly. Nobody wants to be trapped. Nobody wants a quick trade to become a long-term investment.”

Takeover Spree

Exchange operators are turning to acquisitions to expand globally as regulators open home markets to more competition and investors demand lower trading costs.

Singapore Exchange’s bid for Sydney-based ASX on Oct. 25 set off a spree of offers. LSE agreed to buy TMX for about $3.1 billion on Feb. 9, and Deutsche Boerse followed less than a week later with its takeover of NYSE Euronext. In the same month, Bats Global Markets agreed to buy Chi-X Europe Ltd., Europe’s largest alternative trading system.

While the deals led to immediate gains in ASX, TMX and New York-based NYSE Euronext, their shares have since given up most of those advances. ASX closed yesterday at A$34.36 ($34.74), A$9.06 below the current value of the Singapore bourse’s bid. That’s the widest gap since November, Bloomberg data show.

Singapore Exchange has agreed to pay 3.473 shares of its own stock and A$22 for each ASX share, initially valuing the offer at A$48 each. Since jumping 19 percent on the day the deal was announced, ASX lost 18 percent through yesterday on concern regulators and politicians will block the takeover.

ASX advanced 0.5 percent to A$34.53 in Sydney today. Singapore Exchange slipped 1 percent to S$7.80 in Singapore.

‘Pretty High Probability’

The current premium of 25 percent is the biggest for any global deal worth more than $1 billion, data compiled by Bloomberg show.

“It’s telling you that the market is starting to price in a pretty high probability that the deal doesn’t get done,” John Maysles, an event-driven analyst at broker-dealer Elevation LLC, said in a telephone interview from Los Angeles.

The bid still requires the support of Australian Treasurer Wayne Swan, the Reserve Bank of Australia, the country’s Foreign Investment Review Board, the Australian Securities & Investments Commission and parliamentarians, several of whom have opposed the sale. The Australian Greens party, “will not be facilitating or supporting this takeover,” leader Bob Brown said Oct. 26. Lawmaker Bob Katter called the bid “lunacy.”

To overcome opposition from lawmakers who raised concerns on national interest grounds, Singapore Exchange on Feb. 15 offered to give more board seats to Australians.

Labor Government

Laws amending the Corporations Act to raise ASX’s foreign ownership cap also need to be passed in both houses of Australia’s parliament. The minority Labor government led by Prime Minister Julia Gillard needs the support of four independent or Greens lawmakers to pass a bill.

Matthew Gibbs, a spokesman for ASX, said the exchange doesn’t comment on market movements and valuations. Magdalyn Liew, a spokeswoman for Singapore Exchange, didn’t return phone and e-mail messages outside normal business hours.

TMX has fallen 10 percent since jumping 6.4 percent on the day LSE announced its takeover. The offer came three months after Canadian regulators rejected Melbourne-based BHP Billiton Ltd.’s hostile bid for Potash Corp. of Saskatchewan Inc.

The gap between the offer and TMX’s shares widened to 183 pence ($2.98) this week, the most since Feb. 18, even after the Ontario Teachers’ Pension Plan, Canada’s third-biggest retirement fund manager, said last week it supports the deal.

‘Political Objection’

Trading in TMX is “reflecting potential concern over political objection and timing,” said Peter Lobravico, vice president of merger arbitrage trading and sales at Wall Street Access in New York.

The Canadian government hasn’t started its review of the acquisition because the exchanges have yet to apply, Industry Minister Tony Clement said March 15. Once that happens, the government will have 45 days to evaluate whether the deal would benefit the country, a timeframe that can be extended.

Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce in Toronto, and Montreal-based National Bank of Canada (NA) said March 9 they opposed the transaction.

“It is appropriate and responsible of our governments and regulators to carefully examine our proposed merger,” Carolyn Quick, TMX’s spokeswoman, said in an e-mail. “We have developed a compelling agreement and we will work closely with them to ensure they too recognize its important benefits to Canada. We expect the deal to close in the second half of 2011.”

‘Tough Ride’

Victoria Brough, a spokeswoman at LSE, declined to comment. LSE’s shares rose 0.5 percent to 836 pence in London today, while TMX lost 0.4 percent in Toronto.

NYSE Euronext’s shares, which closed $3.18 above Frankfurt- based Deutsche Boerse’s offer price on March 16, ended $1.29 below the bid three trading days later, data compiled by Bloomberg show. The stock closed yesterday at $34.88, 50 cents below the offer, and declined 0.8 percent to $34.59 today.

Nasdaq OMX Group Inc. (NDAQ) of New York was in talks with lenders to fund a possible counter offer for NYSE, two people with knowledge of the matter said last week. A bid has yet to materialize. Atlanta-based IntercontinentalExchange Inc. (ICE) was working with Nasdaq on an offer, said one of the people, who declined to be identified because the matter is private.

NYSE Euronext “has a lot of people rumored to be circling,” said Nancy Havens-Hasty, president of Havens Advisors LLC, a New York-based merger arbitrage fund manager. “It’s going to be a tough, tough ride for any of them to get their act together.”

‘Get Burned’

Deutsche Boerse and NYSE Euronext also face an in-depth European Union review of their merger, the region’s antitrust commissioner said yesterday. The European Commission, the 27- nation EU’s executive arm, must rule on the takeover, which would combine NYSE Euronext’s Liffe and Eurex, jointly owned by Deutsche Boerse and the Swiss stock exchange.

Ray Pellecchia, a spokesman at NYSE Euronext, declined to comment, as did Deutsche Boerse’s Naomi Kim. Deutsche Boerse’s shares slipped 0.6 percent to 52.72 euros today.

“There’s a lot of uncertainty out there about exactly what’s going to happen,” said Timothy Ghriskey, chief investment officer at the Solaris Group LLC in Bedford Hills, New York, which manages $2 billion. “It can provide opportunities, but it’s an easy way to get burned.”

Overall, there have been 5,172 deals announced globally this year, totaling $536.4 billion, a 22 percent increase from the $440.1 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Chris Nagi at chrisnagi@bloomberg.net.

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