The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. Picture: REUTERS / TOBY MELVILLE
The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. Picture: REUTERS / TOBY MELVILLE

Hong Kong — Bankers have a tough choice to make as they decide whether to support Hong Kong Exchanges & Clearing’s (HKEX’s) $37bn bid for its London counterpart.

The proposed deal is the biggest transaction out of Asia during a slow year for mergers & acquisitions (M&A), and banks would normally be flocking to HKEX’s side to try and get a slice of the action. On the other hand, the long-term risks of supporting the unsolicited offer could be higher.

HKEX has been discussing borrowing between £7bn and £8bn to back its proposed takeover, Bloomberg News reported last month. Lenders considering whether to join the financing have been weighing the likelihood that the deal will turn hostile after London Stock Exchange’s (LSE’s) initial rejection, people with knowledge of the matter said.

Banks typically prefer to work on friendly, agreed deals as hostile transactions can end up hurting long-term relationships with prospective clients. Some banks that have spoken to HKEX are concerned that joining the funding may jeopardize future work for Blackstone Group, one of Wall Street’s biggest fee payers, according to the people.

That’s in addition to any potential damage they are considering to their relationship with LSE, the people said, asking not to be identified because the information is private. HKEX’s bid is conditional on LSE dropping its own $27bn acquisition of Blackstone-backed data provider Refinitiv.

Potential fees

At stake is up to $100m in fees that banks could earn from the Hong Kong bourse operator, according to New York-based consulting firm Freeman & Co. HKEX could pay out fees of as much as 0.5% of the financing package’s value to banks providing initial funding for the deal, in addition to roughly $30m to $50m in M&A advisory fees, Freeman estimates.

Regardless of their decisions, HKEX should have no trouble finding enough funding for its bid. And any risks are academic at this point, as HKEX is still trying for a friendly deal and hasn’t yet gone hostile. Under UK takeover rules, HKEX must submit a formal offer by October 9 unless LSE grants an extension.

A representative for HKEX declined to comment.

A successful takeover would turn into one of the biggest global deals of the year and help lift volumes in Asia and Europe. Announced M&As involving Asian companies are down 23% this year to $735.4bn, while deal volumes are down 20% in Europe to $822.5bn, data compiled by Bloomberg show.

HKEX is being advised on the bid by Moelis & Co. It later added UBS and HSBC to its stable of advisers and used Credit Suisse Group to arrange some meetings with LSE investors, people with knowledge of the matter said last month.

Goldman Sachs, Morgan Stanley and Robey Warshaw are lead advisers to LSE, which is also working with Barclays and corporate broker Royal Bank of Canada.

With Jan-Henrik Förster