By Sumeet Chatterjee and Scott Murdoch
HONG KONG (Reuters) - Hong Kong's bourse on Tuesday scrapped its unsolicited $39 billion approach for London Stock Exchange Group (LSE) <LSE.L> after failing to convince LSE management to back a move that could have transformed both global financial services giants.
The surprise cash-and-shares approach, made last month, had threatened to upend the LSE's own $27 billion plan to buy data and analytics company Refinitiv. The Hong Kong exchange had said the LSE would have to ditch the Refinitiv purchase for its offer to go ahead.
Shares in the Hong Kong Exchanges and Clearing Ltd (HKEX) <0388.HK> closed the morning trading session up 2.6% after it announced its decision, compared with a 0.7% gain for the blue-chip Hang Seng Index <.HSI>.
In a blog post, HKEX chief executive Charles Li wrote, "We still believe the strategic rationale for the combination of our two businesses is compelling and would create a world-leading market infrastructure group."
"Despite a huge amount of work and discussions with a broad set of regulators and extensive shareholder discussions," Li wrote, "the level of engagement from LSEG led us to conclude that the continued pursuit of a combination of the two businesses would not be in the best interests of our own shareholders."
The LSE was not immediately available to comment. Refinitiv is 45%-owned by Thomson Reuters <TRI.TO> which owns Reuters News.
The approach's chance of success had been viewed by analysts as slim after it was emphatically rejected by the LSE just two days from the HKEX going public with its interest. The political turmoil engulfing Hong Kong, and perceptions of Beijing's growing influence over the city, were seen as another key obstacle to any deal.
Subsequent efforts by HKEX officials to engage with LSE shareholders had also met with resistance. Some investors told Reuters the HKEX would have to raise its offer by at least 20% - mostly in cash - to tempt LSE shareholders.
"The price tag from the Hong Kong exchange perspective was getting a bit too high, so it's good for the shareholders that they decided to walk away," said Hao Hong, head of research at broker BOCOM International.
Since the HKEX went public with its interest in mid-September, its shares had fallen 8%, compared with a 5% drop in the Hang Seng benchmark.
HONG KONG - WHAT NEXT?
The failure of the bold move leaves open the question of what Li might try next to fulfill the HKEX's strategy of being "China-anchored and globally connected".
The HKEX has been the world's largest capital-raising venue in five of the past 10 years, but has been working to diversify its equities focus, launching a bond trading platform with China and buying the London Metal Exchange in 2012 for 1.4 billion pounds ($2.2 billion).
"HKEX will continue to try other things. Charles Li has done a lot of deals, most notably the London Metal Exchange. It may not be a stock exchange, but other related areas," said Bocom's Hong.
Under British takeover rules, the HKEX had until Oct. 9 to make a binding offer for LSE. The withdrawal of the approach means it cannot bid again for the LSE for at least six months unless the LSE's management agreed to an offer, another group made a bid for the London exchange operator, or other events were deemed to be a material change in the LSE's circumstances.
"If the Refinitiv deal surprisingly fails to get approval, I think we could see HKEX come again," said China Galaxy Securities analyst Chi Man Wong.
ADVERTISEMENT"The (LSE) shareholder meeting (to approve the Refinitiv purchase) has been tentatively set for November but there is no firm date. If that deal fails then HKEX will be there."
Analysts at Bank of America said investors had been worried that the HKEX's pursuit of a deal could have led the exchange to raise fresh funds - weighing on the price of existing shares.
"We think there may still be questions as to why HKEX proposed the acquisition when it seemed somewhat challenging to bring to fruition, but we believe investors will likely focus more on the fundamentals of the company and the market in Hong Kong," they said in a research note.
(Reporting by Sumeet Chatterjee and Scott Murdoch in Hong Kong and Devika Syamnath in Bengaluru; Writing by Jennifer Hughes; Editing by Kenneth Maxwell)
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