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‘Double Dip’ Arbitrage Emerges as ASX Premium Widens: Real M&A

Australian Securities Exchange
A sign for the Australia Securities Exchange (ASX Ltd.), is displayed at the entrance to the building in Sydney. Photographer: Ian Waldie/Bloomberg

Singapore Exchange Ltd.’s offer to pay the biggest premium ever for a securities exchange to buy ASX Ltd. is now giving traders a chance to double their money.

Australia’s national bourse jumped 19 percent on Oct. 25, when the Singapore Exchange offered A$8.3 billion ($8.3 billion) in cash and stock. Shares of Sydney-based ASX have since lost most of the A$6.79 rise on concern regulators and politicians will block the cross-border takeover. With the bid currently valued at A$43.26 a share, traders who profit from mergers and acquisitions stand to gain another 19 percent from betting the deal will be completed, according to data compiled by Bloomberg.

Singapore Exchange’s Chief Executive Officer Magnus Bocker wants to create the world’s fifth-largest bourse as he tries to attract business away from Hong Kong Exchanges & Clearing Ltd., the world’s most profitable exchange. While the bid for ASX, struck at five times the premium of Deutsche Boerse AG’s deal for NYSE Euronext, has drawn criticism from owners who say Singapore Exchange is paying too much, it’s also giving arbitragers an opportunity to reap some of the biggest profits.

“There’s a chance for investors to double-dip here,” said Andrew Ross, partner and global equity trader at First New York Securities LLC, a New York-based proprietary trading firm that bets on stocks, commodities, currencies and derivatives. “The super-wide arbitrage spread is obviously the result of cross-border regulatory concerns. The risk is it never gets consummated.”

‘Business Logic’

Magdalyn Liew, a spokeswoman at Singapore Exchange, declined to comment.

“ASX makes no comment on its share price,” Matthew Gibbs, a spokesman for ASX, said in an e-mail. “But at our recent half-year result announcement the CEO restated the board’s commitment to the business logic of a combination with SGX and the benefits of the proposal for ASX stakeholders.”

Singapore Exchange agreed to pay 3.473 shares of its own stock and A$22 for each ASX share, valuing the acquisition at A$48 apiece, the bourse said on Oct. 25. The deal would be the first exchange takeover in the Asia-Pacific region and help narrow the gap to Hong Kong Exchanges, home to companies valued at $3.3 trillion, data compiled by Bloomberg show.

A combination of Singapore Exchange and ASX would oversee $2.2 trillion of shares. ASX earned 74 cents before interest and taxes per dollar of revenue in its latest fiscal year, the third-highest among global bourses. That’s more than the 57 percent operating margin for Singapore Exchange, the data show.

More Competition

Both Singapore Exchange and ASX face increasing competition in their home markets. The Singapore Mercantile Exchange started in August to compete with a unit of the Singapore bourse, while Chi-X Global Inc., the electronic trading platform, plans to open in Australia.

“Capital will gravitate over time to exchanges with the most liquidity and the most efficient operations,” Singapore Exchange’s Bocker, 49, said in an e-mailed statement on Feb. 10. It helps to “underscore the rationale for exchange consolidation and the merits of an enlarged group,” he said.

The 42 percent premium to ASX’s 20-day average before the announcement was the highest price offered for a securities exchange, exceeding the 37 percent premium that Frankfurt-based Deutsche Bourse agreed to pay International Securities Exchange Holdings Inc. in 2007, data compiled by Bloomberg show.

Singapore Exchange’s offer for ASX was the first of three cross-border exchange acquisitions announced since October.

National Identity

Deutsche Boerse offered $9.5 billion for NYSE Euronext this month, while London Stock Exchange Group Plc agreed to pay $3.1 billion for TMX Group Inc. in Toronto. Both struck deals at premiums of 8.1 percent, data compiled by Bloomberg show.

Nasdaq OMX Group Inc. of New York also discussed a joint bid with Atlanta-based IntercontinentalExchange Inc. to counter Deutsche Boerse’s offer for NYSE Euronext, a person with knowledge of the matter who declined to be identified because the talks were private said last week.

“Most Asian markets are very tied to their national identities,” Larry Tabb, founder and chief executive officer of Westborough, Massachusetts-based research firm Tabb Group LLC, said in an e-mail. “Unless there was a significant premium, the deal wouldn’t have a chance of going through.”

ASX’s shares jumped the most since 1998 on the day of the announcement. The stock then fell by the most in 20 months the next day after Australian lawmakers said they wouldn’t support the acquisition, which requires parliamentary approval.


The Australian Greens party, whose votes Prime Minister Julia Gillard needs to pass legislation, “will not be facilitating or supporting this takeover,” leader Bob Brown said Oct. 26. Lawmaker Bob Katter called the bid “lunacy.”

The proposed purchase, which won approval from Australia’s watchdog on Dec. 15, requires the support from each exchange’s shareholders, a majority of the Australian parliament and government investment regulators.

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

It also pledged to keep key staff in Australia and to invest in services -- including an Australian dollar interest-rate swaps clearing facility -- in the country.

Concern the acquisition will be blocked has left shares of ASX so far below the offer price that speculators now have more to gain from betting on the takeover’s success, said Chris Weston, an institutional dealer at IG Markets in Melbourne.

‘Risk Worth Taking’

The current bid, which is expected to close at the end of June, is A$6.84 higher than ASX’s closing price of A$36.42 today. On an annualized basis, the deal would yield a profit of 56 percent, data compiled by Bloomberg show.

“I’m sitting in the favoring it to get done camp,” said Weston. “If you are prepared to take on a little bit of risk there is more upside than downside to the situation. It is a risk worth taking.”

While the record premium for ASX may help to enrich arbitragers a second time, Singapore Exchange’s shares have slumped on concern the offer price is too expensive.

After reaching a 2 1/2 year-high in the days leading up the takeover announcement, Singapore Exchange has since declined about 22 percent. Morgan Stanley of New York is advising Singapore Exchange on the transaction, while ASX has hired Zurich-based UBS AG for advice, the bourses said.

“SGX is paying what they think is needed to get the approval from relevant parties,” said Sam Hilton, Hong Kong-based analyst at Keefe Bruyette & Woods Asia Ltd. “There is a PR element to the terms of the deal.”

Relative Value

Singapore Exchange’s offer as of the end of last week valued ASX’s equity and net debt at about A$7.1 billion, or 14.5 times its estimated earnings before interest, taxes, depreciation and amortization of A$486 million, according to data compiled by Bloomberg.

That’s 61 percent more than the estimated 2011 Ebitda multiple of about 9 times that Deutsche Boerse’s takeover of New York-based NYSE Euronext will cost, the data show. The LSE’s acquisition of the Toronto exchange was valued at 8.9 times.

The proposed takeover price is “unusually high,” Atsushi Saito, president of the Tokyo Stock Exchange, the Singapore bourse’s largest outside shareholder with a 4.99 percent stake, told reporters at a briefing in Tokyo on Feb. 22.

“These situations of cross-border consolidation of exchanges in what used to be a fragmented market are very tricky,” said Andrew Whittaker, a merger-arbitrage analyst at Timber Hill LLC in Greenwich, Connecticut. “There’s a payoff if you get it right, but it can be painful if you don’t.”

Equinox Minerals

Elsewhere in mergers and acquisitions, Equinox Minerals Ltd., owner of Africa’s biggest copper mine, offered C$4.8 billion ($4.9 billion) in cash and shares for Lundin Mining Corp., challenging a planned takeover by Inmet Mining Corp.

Equinox will pay C$8.10 a share for Toronto-based Lundin, the Perth-based company said today in a statement. That’s 26 percent more than Lundin’s Feb. 25 close of C$6.45 a share. Inmet of Toronto agreed to buy Lundin in January for an announced value of C$4.1 billion, giving it about 53 percent of a new company to be called Symterra Corp.

There have been 3,657 deals announced globally this year, totaling $355.3 billion, a 25 percent increase from the $283.7 billion in the same period in 2010, according to data compiled by Bloomberg.

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