Bloomberg News

Bourse Rivaling London May Stem From Reported Japan Merger Talks

November 07, 2011

Nov. 7 (Bloomberg) -- Tokyo Stock Exchange Group Inc. has entered late-stage talks to buy Osaka Securities Exchange Co., the Nikkei newspaper reported, a merger that would create an exchange rivaling London’s in value.

Osaka Securities rose 7.3 percent to close at 391,500 yen after the Nikkei said Tokyo Stock Exchange, the privately held company that runs the main bourse in the world’s third-largest equity market, would offer to buy as much as 66 percent of its rival. TSE has made no decision like that reported today, the exchange said in a statement. Osaka’s bourse has made no decision on a merger, it said in a separate statement.

TSE president Atsushi Saito in March began talking publicly about a merger between Japan’s two largest bourses. A marriage would give the 133-year-old Tokyo exchange, home to Sony Corp. and Toyota Motor Corp., access to OSE’s derivatives trading system, where futures on the Nikkei 225 Stock Average are traded. It may also cut computer system costs for the two exchanges.

“From the point of view of efficiency, it makes sense for the OSE and TSE to bring their respective strengths in derivatives and stocks to a merger,” said David DeGraw, a director in electronic trading services for Daiwa Securities Capital Markets Co. in Tokyo. “A merger would reduce IT costs in the long-term if the exchanges decide on a unified trading platform.”

Rivaling London

Tokyo Stock Exchange is valued between $1.89 billion and $2.52 billion, 1.5 to 2 times more than Osaka, the Nikkei said. Added to Osaka’s $1.35 billion market capitalization as of today’s close, the combined company would have a value of as much as $3.87 billion, the data show. That’s more than Chicago- based CBOE at $2.46 billion and the London Stock Exchange at $3.79 billion.

Osaka Securities Exchange got 37 percent of its operating revenue from trading and clearing of derivatives associated with the Nikkei 225 Stock Average in the fiscal year through March 31, according to figures in an Oct. 26 investor presentation. The Nikkei 225 tracks companies listed in Tokyo.

More than $30 billion in exchange mergers have been proposed worldwide since October 2010. Cross-border deals have met resistance from shareholders and regulators.

Australia blocked Singapore Exchange Ltd.’s bid for ASX Ltd. on national interest grounds. A shareholder-approved merger between NYSE Euronext and Deutsche Boerse AG faces an anti-trust complaint from the European Commission. The complaint says the combined company would monopolize derivatives trading, according to a person familiar with the matter.

‘Exchanges are consolidating’

London Stock Exchange’s offer for Toronto-based TMX Group Inc. was withdrawn because too few owners supported it. TMX’s board last month endorsed a rival bid from a group of Canadian banks and pension funds that seeks to merge TMX with two domestic trading platforms.

“Exchanges are consolidating,” said Ichizo Yamauchi, principal executive officer at Tokyo-based Kokusai Asset Management Co. “In that context, a merger between Tokyo and Osaka is an inevitable development.”

TSE’s Saito said in July that the bourse is still planning an initial public offering and will press ahead on a merger with Osaka. The Osaka bourse has said it “can’t merge” if the Tokyo exchange sells shares to the public beforehand, according to a Reuters report on June 6 that cited Michio Yoneda, Osaka Exchange’s president.

‘Japan’s Status’

“The merger is needed to maintain the Japanese market’s status as emerging markets are integrating and the capitalization of other Asian markets is growing,” said Yumi Nishimura, an analyst at Daiwa Securities Group Inc. “Their decision is late and there’s an impression that they may finally take this step.’”

Overseas investors made 61 percent of the trades on Japan’s top three exchanges in the week ended Oct. 28, according to TSE data. The Nagoya Stock Exchange, which today had turnover of about $7 million, is the country’s third-biggest bourse.

“In the current set-up, intensifying competition in terms of pricing and liquidity means that foreign investors will be moving their orders to Hong Kong or Singapore,” Kokusai’s Yamauchi said. “There’s the danger that Japan will become a local market.”

--With assistance from Norie Kuboyama and Satoshi Kawano in Tokyo. Editors: Jason Clenfield, Nick Gentle.

To contact the reporter on this story: Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net; Eleni Himaras in Hong Kong at ehimaras@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.


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