The ASX, The National Interest And The Hung Parliament

This story features ASX LIMITED, and other companies. For more info SHARE ANALYSIS: ASX

By Greg Peel

The Singapore Exchange (SGX) has made a cash and scrip offer for the Australian Securities Exchange ((ASX)) which represents an all-cash equivalent of $48. That's a 37% premium to the ASX's last traded price before the halt and a 45% premium to its six-month volume-weighted average price.

Despite the fact the SGX has told its shareholders the deal will be some 20% earnings accretive for them, analysts agree it's still a cracker of a deal for ASX shareholders as well, at least in terms of the cash equivalent premium. Let's face it, prior to rumours beginning last month about a possible takeover afoot, ASX shares had been wallowing in a pit of uncertainty based on depressed turnover volumes and the threat of newly approved competition (first up, Chi-X) to its previously ridiculous and arguably unlawful monopoly.

From whence were ASX shares ever going to derive a positive catalyst in the short to medium term? It might have taken years before a 40% rally could be achieved.

So on that basis, the SGX offer is a gift from above. Or at least from the north. However, it's not that simple.

Firstly, cash represents only 46% of the offer (fixing closing prices at the offer date) which means ASX shareholders are also being asked to take on the risk of shares in the new combined entity. Synergies expected by the parties amount to only 9% in costs given the two exchanges do have some differing technologies and are going to run as effectively two shops anyway, just as they are now. Any ongoing value comes from whether one sees strength in Asia-Pacific numbers of two linked exchanges, which the parties offer as 7-14% revenue based synergies. China might be the economic miracle but little Singapore has also been going from strength to strength recently as an important financial centre.

However, in taking on combined shares, ASX shareholders are also exposing themselves to a much higher level of gearing, along with the risk of whether those revenue synergies are achievable. Analysts are not necessarily in agreement on whether 46% cash is sufficient trade-off for these risks or not.

(Note also that the SGX and ASX tried a tie-up of sorts a few years back, which mostly amounted to allowing Australian investors direct access to Singapore-listed stocks. The deal flopped due to lack of investor interest).

JP Morgan is definitive, suggesting that on the deal metrics alone ASX shareholders would be better to take the money and run (meaning sell out of ASX ahead of any transaction) rather than take on the new shares. It has today downgraded ASX from Overweight to Neutral.

Credit Suisse, on the other hand, upgraded its previous Underperform rating on ASX to Neutral given its 75% expectation the deal will go through.

But that's where the fun starts.

Under recently ratified rules, any Australian listed company deemed to be “in the national interest” is subject to a 15% restriction on foreign ownership. The ratification came recently given a flood of Chinese attempts to raid Australian resource stocks (think OZ Minerals) and their existing projects, but it also applies to companies such as monopoly carrier Qantas ((QAN)) and monopoly infrastructure owner Telstra ((TLS)). As noted, the ASX was a monopoly.

But it's not now. Since the ASX had its regulatory oversight powers removed and handed to ASIC, and since regulatory changes have allowed for the entry of competition, the ASX is no longer a monopoly as an exchange. It does, however, still have a monopoly on clearing house and settlement infrastructure. Macquarie notes that when OMX recently merged with the NASDAQ and EuroNext with the NYSE, in each case unique components of European payments architecture were not sold.

Hence we may have hit a hurdle on a “national interest” basis. Another hurdle is that SGX is 23% owned by Temasek which is Singapore's state-owned sovereign fund. The real problem with Chinese takeover attempts, as far as the government was concerned, was that the suitors were fully or partially state-owned. Put these two problems together and perhaps one can make a case against national interest.

But can the government really take away the ASX's monopoly on the one hand, by allowing competition, and on the other block a takeover on a “national interest basis”? It would seem a tad contradictory, but then it is regulators and politicians we're talking about.

And that's where the fun really starts.

Aside from the relevant Singapore authority and ASIC needing to approve the deal, the Foreign Investment Review Board must assess before the Treasurer himself weighs in with a right to block. Let's say both give the thumbs up. In order for the deal to then proceed, a special amendment would have to be made to the 15% limit legislation, and such an amendment would need to be voted on in parliament.

Oh my God. You can just hear them already, can't you? This disparate and “hung” bunch of self-serving, back-stabbing, mostly pig-ignorant political animals might be charged with the task of reaching a sensible decision on the deal. Yeah right.

The Opposition, which works solely on the basis of “if they say white, we say black”, will await the Treasurer's (and thus by proxy the government's) decision and then scream blue murder in the opposite direction. If it's a yea, Comrade Hockey will waste no time in taking every opportunity to harrumph and snort and generally carry on without the slightest clue, and Malcolm Turnbull will demand a cost-benefit analysis. If it's a nay, the Coalition will no doubt suddenly become dedicated free market capitalists again. And all of that's predicated on the government making a sensible decision in the first place.

The rural independents will have some problem with listed agricultural stocks, the Greens will question the carbon footprint of such a deal, and Bob Katter specifically will say something unintelligible. There will be arguments back and forward across the floor with no resolution until every electorate gets a new toilet block in return or parliament breaks for Christmas, in which case it will all start again next year.

Analysts agree there are many hurdles to the ultimate approval of an ASX-SGX merger. Parliament is surely the greatest hurdle, and its attitude completely unpredictable.

Which tends to suggest JP Morgan has the right idea. The problem is, despite the $48 equivalent value of the offer ASX shares managed only to rise above $42 on re-open yesterday and have already fallen 4% this morning to under $40 in an otherwise flat market.

Given the shares were trading under $36 before the announcement, does one thank the gift horse and be happy or hang on to see what might transpire?

Not all FNArena database brokers have provided fresh reports on ASX today so we currently have 3/2/1 Buy/Hold/Sell ratio from those recently updating their ratings (Citi and Deutsche Bank have been quiet nearly all year). The consensus target price has moved up, but only from $35.57 to $39.75.

Credit Suisse is the only broker which has raised its target to match the equivalent $48 bid, while Macquarie is clearly exhibiting its scepticism on such a deal going through (and its otherwise low rating of ASX as an investment) by maintaining an Underperform rating and a target of only $26.15, which impacts heavily on that consensus figure. Without Macquarie consensus would be $43.22.

Goldman Sachs is in the Hold camp with a target of $41.75.

Click to view our Glossary of Financial Terms