Osaka Shares at Low for Year as Tokyo’s Tender Closing

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

Osaka Securities Exchange Co. shares fell to the lowest level this year before Tokyo Stock Exchange Group Inc.’s tender offer for its smaller competitor ends today.

The stock closed at 438,500 yen, the lowest level since Nov. 28, a week after the bourses said they would merge. Volume was 77 percent below the five-day average, according to data compiled by Bloomberg. The 480,000 yen-a-share tender, which began July 11, closes at 3:30 p.m. local time today, according to the Tokyo bourse, which needs more than 50 percent of shares to proceed. The results will be announced tomorrow.

Merging Japan’s biggest stock venues is the first step in a government plan for creating a “comprehensive” exchange handling equities, commodities and other securities as the country seeks to re-establish itself as a financial center. While regulators have scuttled more than $30 billion in global exchange mergers since 2010, Japan’s Fair Trade Commission approved the deal July 5.

“We did tender our shares,” said Robert Lynch, a New York-based director of research at Westchester Capital Management Inc., which holds about 4,500 share in the Osaka company. “Given the level we had bought it at and the return we were going to realize, it was a reasonable exit for us. There was a case for improved terms but ultimately we decided to accept it. I think there will be some that will hold out but they’ll probably be able to get the 50 percent.”

Naoya Takahashi, a spokesman for the Tokyo bourse operator, declined to comment on the progress of the tender. Osaka spokesman Masahiro Yada wouldn’t comment on the bid or the share price, which has declined 5.2 percent this month.

Selling Out

“People may have sold their shares on expectations the tender will succeed and the offer price won’t be raised,” said Hiroshi Torii, an analyst at Deutsche Bank AG.

The Osaka bourse dominates Japan’s growing futures and options markets, while Tokyo hosts the world’s No. 3 cash equities venue by the value of companies listed. Osaka’s shares haven’t risen above the offer price since the bid was announced. The stock gained 0.9 percent to 442,500 yen as of the 11:30 a.m. trading break today with volume 85 percent lower than the 5-day average.

Declines in the price and trading of the shares reflect the approach of the tender deadline, according to Peter Lenardos, an exchange analyst at RBC Capital Markets in London.

Investors intending to sell stock to Tokyo “will have already bought it because if you buy today the stock won’t settle in time,” he said. “As we approach the end of the tender period investors are beginning to look through it. The deal has been approved. Now what’s next?”

Holding Out

Jupiter Asset Management Ltd., which owns about 1.1 percent of OSE, said July 26 that shareholders deserve a higher price because Osaka is more profitable than Tokyo. JO Hambro Capital Management Ltd., the third-largest shareholder, won’t tender its

5.1 percent stake because it wants to own a piece of the merged exchange, Nudgem Richyal, a Singapore-based portfolio manager at JO Hambro, said on July 10.

“The takeover bid will be one of the most symbolic events for Japan in taking a step towards becoming Asia’s financial hub,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., which has 33 trillion yen ($416 billion) in assets. “If this doesn’t kick-start well, there’s a danger it will lead to Tokyo’s decline.”

The transaction has two steps, with TSE first bidding for between 50 percent and 67 percent of Osaka in the tender offer. Should that succeed, owners will then vote to complete the merger via a share swap that values TSE at 1.7 times Osaka. The companies project the deal will close in January.

The country’s Financial Services Agency was involved in discussions between TSE and Osaka before the deal was announced, two people with direct knowledge of the talks said in March.

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