There’s more than meets the eye to what looks like an ASX announcement this afternoon that its merger-by takeover deal with Singapore Exchange has been nixed by the treasurer, Wayne Swan.
It all goes to the fine print: ASX doesn’t actually say the deal has been rejected.
It says that Singapore Exchange – the exchange that was the create the merged group by taking over ASX – has been notified by Australia’s Foreign Investment Review Board that Swan “is disposed to the view, under the Foreign Acquisitions and Takeovers Act, that the proposed merger of ASX and (the Singapore exchange) should be rejected as contrary to the national interest.”
That’s a convoluted way of saying that Singapore exchange (SGX) has been told that if it can’t improve the terms in the ASX’s and Australia’s favour, the deal is dead.
Evidence that rather than being sent packing SGX has been told something slightly less final – that it will be sent packing if it doesn’t come up with a new merger plan – comes from ASX’s subsequent comment in its statement that it will “continue to evaluate strategic growth opportunities (including further dialogue with SGX on other forms of combination and co-operation.”
SGX is even more explicit, saying in its announcement that it “has been invited to provide further comments to the Foreign Investment Review Board and will consider appropriate responses.”
Sweeten and stir
Whether the two exchanges can come up with a merger formula that satisfies Swan remains to be seen: SGX says it will consider whether it can be done, but does not say it will in fact re-present the deal.
Another possibility is that SGX CEO Magnus Bocker and his board will decide that the deal cannot be sweentened sufficiently, and abandon the merger attempt.
SGX is a smaller exchange than the ASX on every measure bar one, its market value, which in turn is driven by its price-earnings multiple. Put simply, SGX shares are priced for faster growth in coming years than ASX, and that is underpinning the mathematics of the deal.
There are ways to reconstruct the deal so that the ASX gets a larger share, or even to make it a merger rather than a straight SGX takeover of ASX. But they are changes that either see SGX pay a control premium but not actually get control, or SGX pay less, perhaps so much less that ASX cannot recommend the deal to its own shareholders.
SGX and ASX are in a very tight spot now.
They’ve been told the deal they thought worked best will be rejected. And while they’ve also been effectively invited to come up with some other structure that Wayne Swan might find acceptable, that is very hard to do.
The merger of the exchanges isn’t dead, but it’s in the intensive care unit, and will die quickly if the exchanges can’t pull a rabbit out of the hat.