Singapore Exchange (SGX) unveiled an agreed A$8.4 billion ($8.3 billion) takeover offer for Sydney-based ASX Ltd on Monday to create the fifth-largest listed exchange operator in the world.
The merger of SGX and the ASX, Asia's second and third largest listed bourse operators respectively, aims to ward off the threat of alternative trading systems, line up new avenues for growth and cut costs.
The deal, which was widely praised by Australian investors, marks the first major consolidation of Asia-Pacific exchanges and will result in $30 million in cost savings.
It faces several hurdles, including needing Australia's parliament to lift a 15 per cent ownership cap on ASX and Foreign Investment Review Board (FIRB) approval of the deal.
FIRB could take a dim view as SGX is 23 per cent owned by the Financial Sector Development Fund, which is controlled by Singapore's central bank.
"There's quite a few regulatory hurdles for this, which is why the shares are trading below the notional value of the offer," said Tom Elliott, a managing director at MM&E Capital.
"There's FIRB and parliament has to actually approve it. You've got a strange parliament, you've got the rural independents. Nothing would surprise me. It just means this is going to take a while, so there's that uncertainty."
SGX offered a combination of A$22.00 in cash plus 3.473 of its own shares for each ASX share. It said in a joint statement with the ASX on Monday that the offer valued ASX shares at A$48.00 each, a 37 percent premium to ASX's last trade on Friday.
Shares in ASX spiked 25 per cent to A$43.50 after it resumed trade, still well short of a record high of A$61 in early 2008.
SGX shares fell as much as 6.7 percent but quickly pared losses to trade down 1.8 percent at S$9.40.
This is the second-biggest takeover by a Singapore-listed company abroad after Singapore Telecommunications bought Australia's Optus Ltd in 2001 for $9.5 billion including net debt, Thomson Reuters data shows.
The deal is a sign of how Singapore is trying to make itself one of Asia's premier financial and wealth management centres. It also ranks as Asia's second-biggest foreign exchange trading centre after Tokyo.
The combined entity will be overseeing a market worth about $1.9 trillion, ranking it after Tokyo, Hong Kong and Shanghai.
"This will be a highly competitive exchange group in an increasingly globalised world," SGX Chairman JY Pillay said in a statement.
The deal comes just 10 months after Magnus Bocker, former head of NASDAQ OMX, took over the job as CEO. In this time, he has also launched trading of American Depositary Receipts of Asian firms in Singapore and set up Chi-East, a "dark pool" joint venture with Nomura's.
Competition regulators unfazed
However Australia's competition watchdog effectively gave the SGX a green light to pursue the takeover earlier on Monday, saying it did not see any major concerns.
"I think it's a matter between the Singapore Exchange and the Australian Exchange, and I can't see that raising competition issues for us," Australian Competition and Consumer Commission chief Graeme Samuel told Australian radio.
"We're much more focused on the potential for new competitors to enter into the Australian market in terms of stock exchange dealings."
The ASX is due to lose its effective domestic monopoly next year, with a new entrant, Europe's Chi-X Australia Pty Ltd, expected to begin operation in 2011.
"The market will view a SGX-ASX combination as a defensive one, both being exchanges that have relatively mature organic domestic growth opportunities and facing the prospect of losing effective monopoly status with rising pricing pressures as alternative exchanges and trading venues erode share over time", Citigroup analyst Robert Kongsaid in a note to clients.
A combined SGX-ASX would still rank behind Hong Kong Exchanges and Clearing Ltd (HKEx), the world's top exchange operator by market value.
SGX Chief Executive Magnus Bocker is set to become chief executive of the combined group, while SGX's chairman-elect Chew Choon Seng is slated to become the non-executive chairman of the merged group.