Listening to the chief executive of the ASX, Robert Elstone, arguing yesterday that the Singapore Exchange’s proposed merger-by-takeover of the Australian exchange was the best deal possible, it struck me that the ASX and the Australian government are paying a price for procrastination.
Unlike the merger discussions that have emerged between Deutsche Boerse and NYSE Euronext, and London Stock Exchange and TMX, Canada’s main exchange, the ASX-Singapore deal is structured more clearly as an acquisition.
The share and cash takeover proposal was pitched at a 42 per cent premium to ASX’s share price, about five times the premium TMX shareholders will get if the LSE bid goes ahead. Singapore is paying a control premium, in other words, and while it moved the governance terms slightly in Australia’s favour this week, control is what it will get if the bid goes ahead as planned.
Advertisement: Story continues below After unveiling the December half profit, Elstone said both groups would be stronger after the merger, but the cash and share construction of the offer reflect key differences between them.
ASX is several times larger, but is operating in capital markets that are growing less strongly, and is also being opened up to competition. Singapore is still a monopoly, has a more direct connection to fast-growing Asia, and as a result is valued more highly per dollar of earnings. This has allowed it to limit the size of the share component in its offer and retain control of the merged business: ASX shareholders for their part get to cash out almost half of their exposure at a top price, and the shares that make up the rest of their consideration give them a ticket in the merged business.
ASX needs a merger, no doubt. But the takeover must be cleared by the government and enabling legislation passed, and the Greens and independents are already lined up against it.
The Singapore government will own almost 15 per cent of the merged group through its investment company, Temasek, and that has to be a handicap under the foreign investment guidelines Canberra has published. Singapore may come under pressure to quit the stake. But every concession it makes on governance makes the premium it is paying harder to justify.
It’s a conundrum, and in my opinion it’s a product of two things: the time ASX took to find a partner, and failure of the government to set a clear deadline.
Chi-X first flagged its desire to operate a rival market in Australia in 2007, and it was clear now that ASX would have been in the best bargaining position if it had negotiated a deal before August 2009, when the government said it had decided to transfer market supervision from the ASX to ASIC.
That signalled the government was preparing to set the competition dogs loose, and in March last year the then minister for financial services, Chris Bowen, confirmed it by announcing that other exchanges, beginning with Chi-X, would be allowed in.
The ASX’s ability to negotiate from a position of strength was weakened as word leaked that its days as a monopoly were numbered.
A precise cause-and-effect chain is impossible to identify. But ASX’s share price as a multiple of earnings declined from more than 25 times before the boom to about 16 times before the Singapore offer.
Singapore Exchange’s price-to-earnings multiple over the same period stayed up at about 25 times as investors continued to value it as a monopoly, and it is that change in relative valuations which lets it overcome its significant size disadvantage and mount a takeover for the Australian group.
Could things have turned out better for ASX? Yes, if it had moved for a merger more aggressively while still a monopoly (albeit one tagged informally to be opened up to competition), after getting a clear word from the government.
The ASX spent too much time lobbying against the change. But that’s hindsight – evidence, in fact, that the signals from Canberra were unclear: if it had been obvious earlier where the government was headed, the ASX surely would have worked with more urgency to secure a more balanced merger.
Rival exchanges should be allowed in because they will help push trading costs down over time (for the big end of town, primarily).
But Chi-X should not have been given the green light by the government until ASX’s strategy was settled. I suspect that’s how the former treasurer Peter Costello might have handled it – and some inside the Gillard government may well now feel the same way, as they consider whether to approve a deal that will deliver ASX shareholders a big cheque, but also send strategic control of our key capital market platforms overseas.