Hong Kong exchange proposes to buy LSE for £32bn as weak pound burnishes appeal of UK firms

Unexpected bid follows recent string of foreign acquisitions of British companies

(AFP)

The operator of the Hong Kong stock exchange has offered to pay £31.6bn to buy the London Stock Exchange Group, in a surprise move that analysts said was partly driven by the weakness of the pound.

The proposal was first announced by Hong Kong Exchanges and Clearing (HKEX) and confirmed by the London Stock Exchange (LSE) later on Wednesday.

Charles Li, the HKEX chief executive, said the merger “will strengthen ties between the UK and China, particularly in economic and trade terms”.

“The transaction is also a vote of confidence in London and the United Kingdom’s future role as a global financial centre,” he added.

The compliment will be music to the ears of Britain’s Brexit-supporting government, which is likely to play a big role in whether the tie-up goes ahead.

Leaving the EU, whether with or without a transition, poses many risks to the UK financial sector. The industry, concentrated in London, makes up over 7 per cent of Britain’s GDP and employs 1.1 million people.

Graham Spooner, an analyst at The Share Centre, said it is “definitely plausible” that one reason for the proposed acquisition is the cheapness of the pound, which has been pummelled by Brexit turmoil this year.

Will Howlett, an analyst at Quilter Cheviot, agreed, saying the collapse in the UK currency’s value helps with the financing of deals such as the LSE-HKEX merger.

The bid for the LSE follows a string of foreign acquisitions of British companies. Last month, US toymaker Hasbro bought the UK-listed owner of Peppa Pig, while Britain’s biggest pub owner Greene King agreed to sell its entire business to CKA, a Hong Kong real estate group.

Earlier this year, Fuller’s, another UK pub group, sold its brewing business to Asahi, Japan’s largest brewer.

According to one of the LSE’s top 10 shareholders, the approach for the LSE has also been prompted by the US-China trade war, which is weighing on the Chinese economy.

“Clearly they [HKEX] are trying to diversify away from their Chinese exposure, which is why they are bidding now and not nine months ago,” the investor said.

Just as Brexit, through its effect on the pound, has made foreign takeovers easier, it may eventually derail the LSE deal.

“[There is a] real risk that politics would disrupt this deal, with the UK ‘losing’ an industry leader, particularly at a time when Brexit may elevate such sensitivities,” said Mr Howlett.

Britain’s looming departure from the EU has already dented the UK business of financial firms as hundreds have relocated part of their operations and set up new offices in the bloc.

The outflow of business is likely to grow, reducing the UK’s tax base and hitting jobs, the New Financial think tank said in a report earlier this year. It will also “gradually chip away” at Britain’s influence in the financial industry around the world, it added.

The LSE Group’s shares spiked after the announcement by HKEX but later pared gains to trade around 6 per cent higher on the day.