By Margot Patrick
LONDON -- London Stock Exchange Group PLC took a swipe at Hong Kong Exchanges and Clearing Ltd. Friday, rejecting its $36.6 billion bid and questioning Hong Kong's future as a financial gateway to China.
Undeterred, the HKEX said it was disappointed the LSE had failed to properly engage in talks and said it would continue to talk to LSE shareholders about its unsolicited offer.
The U.K. operator said it remains committed to buying financial-information and terminal company Refinitiv Holdings Ltd., a $14.5 billion deal it struck in July that would have been scrapped if the Hong Kong exchange succeeded in its bid.
Shares in LSE were 2% higher after the rejection, having already risen almost 6% on Wednesday after HKEX announced its unsolicited offer, surprising investors. Analysts say HKEX could improve its offer with a larger cash component, or that other exchanges may want to bid for the London exchange.
HKEX's bid has led some investors and analysts to question whether a new round of global exchange consolidation is coming, potentially involving the U.S. exchange giants: NYSE parent Intercontinental Exchange Inc., known as ICE, or futures-exchange behemoth CME Group Inc., the world's biggest exchange operator by market cap.
"We'd expect the U.S. exchanges might be viewed as logical additions to fill the North American presence of a truly global exchange model," Sandler O'Neill + Partners wrote in a research note Thursday. ICE explored a possible bid for the LSE in 2016 but ultimately backed away.
Representatives of CME and ICE declined to comment.
In a letter to the Hong Kong exchange issued publicly, LSE Chairman Don Robert said LSE's board doesn't believe HKEX is the best partner for its long-term positioning in Asia, and that the company's cash-and-shares offer is unattractive because of "inherent uncertainty" around the value of HKEX shares.
"We question the sustainability of HKEX's position as a strategic gateway in the longer term," Mr. Robert said. He added that the Shanghai Stock Exchange is its preferred and direct channel to access opportunities in China.
A successful tie-up between LSE and HKEX looked like a long shot to many analysts because of regulatory and political hoops. Hong Kong is reeling from a summer of antigovernment protests that have raised concerns about China's tightening grip on the financial center. London is grappling with its own political upheaval in the form of Brexit.
The history of the exchange business over the past decade is riddled with failed cross-border deals. Many of these were blocked by regulators out of concerns that a prized national asset would be taken over by foreigners, or that the takeover would give the combined company monopolistic pricing power in crucial financial markets. Exchanges themselves have often failed to agree on deal terms and how to structure a combined entity.
The bid from Hong Kong was the latest for LSE, which has become a highly sought-after target for a range of suitors over several years, attracting multiple bids and making multiple acquisitions of its own. The group, which has been offering stock trading for more than 200 years, now derives much of its value from data services and the popularity of passive investing.
Revenue from LSE's clearing house and financial indexing business far outstrips a 20% contribution from its more traditional exchange businesses of floating companies and securities trading. That was the big lure for the Hong Kong exchange group.
LSE's stock has soared ninefold in the past 10 years, compared with a 47% rise in the FTSE 100 index of the U.K.'s largest companies. It had risen 80% this year even before the HKEX offer.
That performance sets it apart from other U.K. financial companies such as banks whose stocks have been dragged down by low interest rates and stricter regulation since the financial crisis. In contrast, LSE has benefited from postcrisis rules pushing more derivatives through its LCH clearing house and a boom in indexed funds.
Tracing its roots to City of London coffee houses where stockbrokers set up shop, LSE thrived as London established itself as a global hub for company fundraising and trading. It floated its own shares in 2000, and spent much of the next decade fending off takeover attempts by rivals including Nasdaq and Deutsche Boerse AG.
It has averaged a bid approach every 2 1/2 years since its initial public offering, according to analysts at Berenberg Bank.
But while British banks during the 2000s were multiplying in value from global expansion and increased risk taking, the London exchange was at threat of becoming obsolete. Its monopoly on domestic stock trading was ended by a 2007 European Union directive that paved the way for alternative trading platforms. It suffered more and its shares slumped as company listings and trading volumes collapsed after the financial crisis.
Xavier Rolet, who was LSE's chief executive between 2009 and 2017, is credited with reversing the decline and transforming the company into a global force. He led the acquisition of around 25 companies, including LCH and the FTSE Russell financial indexing business.
As of June 30, LSE's post-trade services made up 38% of its GBP1.14 billion ($1.41 billion) in revenue, and information services made up 39%.
In an interview Thursday, Mr. Rolet said his vision for LSE was to deepen its role connecting companies, banks and investors globally, and to let users pay for the products and pieces of financial plumbing they needed access to, rather than making them pay for bundled services at a single price.
"We wanted to be one of the two or three financial infrastructure companies with the full set of products," Mr. Rolet said. He predicted LSE will eventually have an American or Chinese owner as the industry continues to consolidate.
His successor, David Schwimmer, set three goals for the group: to expand globally, become more diversified by asset class and bolster its data analytics business. In August, Mr. Schwimmer said the plan to buy Refinitiv, which supplies market information and operates foreign-exchange and bond trading platforms, addresses all of those ambitions.
LSE's earlier smart bets made the Refinitiv bid possible, since it has a strong share price to use as currency, said Chris Turner, a senior equity analyst at Berenberg. The planned purchase, agreed with Refinitiv's shareholder Blackstone Group, shot LSE stock up 30%.
"That's the problem for Hong Kong exchange. Now you need to pay a premium over that premium. It's too expensive now for others," Mr. Turner said.
--Alexander Osipovich and Caitlin Ostroff contributed to this article.
Write to Margot Patrick at email@example.com