TSE, Osaka Must Heed Offer Concerns, Says OSE Shareholder

Japan Regulator Approves Merger of Nation’s Biggest Bourses
A combination photograph shows the Tokyo Stock Exchange in Tokyo, left, and the Osaka Securities Exchange in Osaka, Japan. Photographer: Tomohiro Ohsumi (Tokyo) and Tetsuya Yamada (Osaka)/Bloomberg

Tokyo Stock Exchange Group Inc. will begin its tender offer for Osaka Securities Exchange Co. tomorrow even as JO Hambro Capital Management Ltd., the OSE’s third-largest shareholder, said the bourses must ensure price concerns don’t derail the deal.

JO Hambro wants to convert its 5.1 percent stake into equity in the merged exchange and doesn’t want disagreement over price to jeopardize the deal, Nudgem Richyal, a Singapore-based portfolio manager at JO Hambro, said in a telephone interview yesterday. Shares of Osaka Securities were unchanged at 459,000 yen today after gaining 1 percent since July 4, the day before Japan’s antitrust regulator approved the merger of the country’s biggest bourses. The Nikkei 225 Stock Average fell 2.7 percent in the period.

TSE’s tender offer for the OSE will run from tomorrow until Aug. 22, OSE said in a statement today. The TSE, which offered 480,000 yen a share for Osaka, has no plans to change the merger conditions, Kazuhiko Yoshimatsu, head of corporate strategy, said yesterday. OSE shareholders plan to hold out for better terms from Tokyo, the Financial Times reported July 8, citing unnamed people familiar with the deal.

“We’re very aware that there are some international money managers out there who want a better price,” said Richyal. “My hope is that management will pay attention to that reality.”

Richyal wouldn’t comment on whether JO Hambro was satisfied with the current offer or on how it will vote. TSE’s bid, which values the Osaka bourse at 129.6 billion yen ($1.63 billion), would create the world’s third-largest exchange based on turnover, according to data compiled by Deutsche Bank AG.

Fidelity Investments

Masahiro Yada, a spokesman for Osaka, declined to comment. Owners of Osaka Securities’ shares support the merger, President Michio Yoneda said at a June 21 shareholders meeting. The Tokyo bourse needs to buy between 50 percent and 67 percent of Osaka’s 270,000 outstanding shares for the merger to be executed.

Fidelity Investments is the biggest shareholder of the OSE, owning about 14 percent of outstanding shares, according to data compiled by Bloomberg. Fidelity declined to comment on the merger.

Given the large holding by JO Hambro, “if this spreads to other shareholders it would probably impact the tender,” said Hiroshi Torii, an analyst at Deutsche Bank AG. “Raising the offer price would seem like a reasonable solution.”


While the TSE’s share of domestic stock trading value is about 96 percent, it was 6.3 percent of the global total in 2011, according to a May 24 report from Deutsche Bank. OSE’s global share was 0.3 percent, making the combined trading value the third-highest after NYSE Euronext and Nasdaq OMX. For derivatives transactions, TSE and OSE combined made up 0.9 percent of global trading value, according to the report.

“The potential benefits of the merger for all parties are large, and therefore I think ultimately all sides will take a pragmatic approach to ensure the deal succeeds,” said Jonathan Foster, Singapore-based director of Global Special Situations at Religare Capital Markets Ltd., who advises OSE shareholders in connection with the merger. “There’s an awful lot of political capital that’s gone in to getting this deal to where we are today.”

Two Steps

Japan’s government wants the marriage of the country’s two largest bourses as a first step to creating a “comprehensive exchange” as it seeks to revive the nation’s standing as a financial hub. The country has three other stock exchanges, in the cities of Sapporo, Nagoya and Fukuoka, two commodities exchanges and a grain exchange.

“The companies have reached a common recognition that a firm position within the domestic cash equities market and derivatives markets will be established and significant synergies will be created by combining the business of the companies,” Osaka’s board said in a statement today. “The company believes that a purchase price of 480,000 yen per share for the company’s common shares in the tender offer is appropriate for the company’s shareholders.”

The transaction will be conducted in two steps, with TSE bidding for as much as 67 percent of Osaka. Once that purchase is complete, Osaka’s shares will be swapped for those of the unlisted TSE, so the new exchange remains publicly traded. The companies project the acquisition will close in January.

“Shareholders are justifiably unhappy with the terms they are being offered, both the cash tender offer price and the share-swap,” said Religare’s Foster. “I do not think it is an attractive price.”

Scuttled Deals

About $32 billion in exchange takeovers have been scuttled since Singapore Exchange Ltd. made a bid for ASX Ltd. in October 2010, according to data compiled by Bloomberg. Singapore’s deal fell through amid calls from the Australian public to maintain domestic control of stock trading.

Hong Kong Exchanges & Clearing Ltd., Asia’s largest bourse by market value, said yesterday that shareholders of London Metal Exchange Ltd. will vote July 25 on its $2.2 billion bid for the world’s biggest venue for base metals futures trading.

The Japanese exchanges will hold shareholder meetings this fall or near the end of the year to vote on the merger, OSE President Michio Yoneda told reporters on May 28 in Osaka.

“We’re very happy with the strategic direction of the merger with the Tokyo Stock Exchange,” said JO Hambro’s Richyal. “I think they are aware of the calls for a different price.”

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