Tokyo Exchange to Outline Osaka Plan Today

Tokyo Stock Exchange Group Inc. may announce as soon as today an agreement to acquire Osaka Securities Exchange Co. in a deal that would create the world’s 10th largest exchange company by share value, according to two people familiar with the matter.

The TSE will make an announcement about its merger plans after a board meeting, according to the people, one of whom has direct knowledge of the talks and the other who was briefed on the deal. Both requested anonymity because the plan is private. Under the proposal, the TSE will be valued at about 1.7 times the market capitalization of it smaller rival, the person with direct knowledge said. That would value TSE at about 193 billion yen ($2.51 billion) after Osaka Securities’ shares rose 1.8 percent yesterday.

Japan’s biggest bourses are discussing a merger after the country lost its place as the world’s second-largest equity market to China. A combination would give the 133-year-old Tokyo venue, home to Sony Corp. and Toyota Motor Corp., access to Osaka’s derivatives trading system, where contracts associated with the Nikkei 225 Stock Average account for most volume. More than $30 billion in bourse mergers have been proposed worldwide since October 2010.

“The value of TSE calculated from the reported merger ratio is much smaller than had been generally expected,” said Shoichi Arisawa, an analyst at Iwai Cosmo Holdings Inc., the biggest Osaka-based brokerage and a holder of shares in the Osaka and Tokyo bourses. “Times have changed. I’m not surprised to hear TSE was valued much lower than we expected considering the current market momentum, trading volume and presence of status of Japanese economy”

Highest Valuation

Osaka Securities and TSE reached an agreement on Nov. 18 and will announce the deal today, the Nikkei newspaper reported on Nov. 19. The Yomiuri newspaper also reported on Nov. 19 that a deal had been reached. The bourses have reached a basic agreement that values the Tokyo company at 1.7 times Osaka’s market capitalization, public broadcaster NHK said Nov. 18, citing an unnamed person.

A combined market value of $3.99 billion would place the company ahead of London Stock Exchange as the world’s 10th- biggest exchange company. The market capitalization of the Osaka exchange was 113.7 billion yen as of yesterday. The highest valuation placed on Tokyo exchange during negotiations was more than 300 billion yen, based on estimates by financial advisers on the deal, a person with direct knowledge of the talks said last week.

Spokespeople for Osaka Securities declined to comment when contacted on Nov. 18, Nov. 19 and yesterday. The bourse said there was “no factual basis” for the reports on Nov. 18. Calls to the mobile telephone number of Osaka President and Chief Executive Officer Michio Yoneda and the office of his chief secretary Masashi Tsuda were not answered or returned.

Management

TSE’s President and CEO Atsushi Saito will be made CEO of the new company, to be called the Japan Exchange Group, under the proposal, the two people said.

“Regarding the possibility of an alliance, of course we’re discussing various issues,” Yoneda said at a media briefing on Nov. 15. A merger would result in significant savings on computer costs, he said at the briefing.

Today’s announcement comes after turnover on the Tokyo exchange’s first section fell yesterday to the second-lowest level this year. Shares worth 757 billion yen were traded, compared with 729 billion on Nov. 15, the lowest since December.

Japan’s equities markets have been declining in value for the last 22 years, with the Topix Index sliding 75 percent through yesterday from a December 1989 peak. yesterday from its December 1989 peak. The total dollar value of the country’s listed companies first slipped below China’s in January 2008 and the two have switched back and forth in the years since.

As of Nov. 13, Chinese shares were priced at $3.50 trillion, compared with $3.45 trillion for Japan, according to data compiled by Bloomberg.

Japan has hosted $551 million in initial share sales this year, less than 0.5 percent of the global total, according to data compiled by Bloomberg. China was the site of $39 billion in IPOs during the same period, the data show.

To contact the reporter on this story: Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

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

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