Australia govt set to reject $7.8 billion SGX takeover of ASX

By Michael Smith and Saeed Azhar

SYDNEY/SINGAPORE (Reuters) - Australia intends to reject Singapore Exchange Ltd's <SGXL.SI> proposed $7.8 billion bid for Australia's ASX Ltd <ASX.AX> on national interest grounds, underscoring the political challenges other major cross-border exchange deals are facing.

The two exchange operators wanted to team up to cut costs, fight growing pressure from alternative trading platforms and avoid being left behind as rivals in North America and Europe get together.

But Australian Treasurer Wayne Swan, facing growing political opposition to the deal, said he intended to reject the bid after getting advice from the country's Foreign Investment Review Board.

"FIRB informed SGX that I had serious concerns about the proposal and that, subject to further consideration, I intended to accept the unanimous FIRB advice that the takeover would not be in the national interest," Swan said.

A final decision had not been made, he added.

If the deal does fail, it will be the latest in a number of cross-border transactions to fall foul of politicians, including BHP Billiton's <BLT.L> <BHP.AX> $39 billion bid for Canada's Potash Corp <POT.TO> last year. It could also bode ill for other major exchange deals before regulators and politicians.

Last week, Nasdaq OMX <NDAQ.O> and IntercontinentalExchange <ICE.N> bid $11.3 billion for NYSE Euronext <NYX.N> in an effort to trump Deutsche Boerse's deal, and pushed their case with an appeal to U.S. patriotism.

London Stock Exchange's <LSE.L> bid to buy Toronto Stock Exchange operator TMX Group <X.TO> needs to overcome growing opposition from banks and the government of Ontario, the home province of the Toronto bourse.

"Governments are getting pretty tough on lots of things,"

said Jason Beddow, Chief Executive at Argo Investments. "I wouldn't say governments are particularly business-friendly at the moment."

CHASING GROWTH

The ASX bid, code-named "Avatar" by SGX's bankers, followed years of informal talks between the two exchanges and other operators on potential tie-ups. A combined SGX-ASX would have created the world's fifth largest exchange in terms of market capitalization.

SGX hadn't decided whether to drop its bid or pursue further dialogue with the FIRB, but the deal was not dead yet, two sources familiar with the transaction told Reuters.

Share moves showed the market doubted the deal could be saved. ASX shares fell as much as 4 percent in late afternoon Sydney trade, while SGX shares spiked more than 6 percent.

Investors said political hurdles were unlikely to be met without radically changing the bid.

"I don't know why it should be rejected on national interest. ASX and SGX will certainly be disappointed ... Having said that, the ASX is a very well run company, that is the consolation here."

Swan did not elaborate on his concerns about the bid, but many politicians viewed the ASX as a key national institution that should not be handed over to a foreign company.

The deal would have needed the approval of Australia's parliament to lift a 15 percent foreign ownership cap on ASX. Australia's minority government only holds power with the support of Greens and independents.

Chief among the concerns of opponents was the Singapore government's 23 percent indirect stake in SGX.

SGX said it would now consider other forms of cooperation with the Australian bourse operator.

"We will continue to pursue organic as well as other strategic growth opportunities, including further dialogue with ASX on other forms of cooperation," SGX said in a statement.

POLITICAL OPPOSITION

The spate of cross-border exchange deals have faced significant political and regulatory hurdles as countries seek to prevent control of bourses moving offshore. Other major regional bourses including Hong Kong Exchanges and Clearing <0388.HK> have caps on ownership which prevent takeovers.

To try to overcome opposition to its deal, SGX agreed in February to allow ASX to have an equal number of directors in the merged company as it sought to lift a 15 percent cap on foreign ownership and counter calls for the merger to be scrapped. Yet, under the agreement, SGX would still have owned a 64 percent share after the merger.

Before the announcement on Tuesday, analysts said SGX could become a target if its ASX bid failed.

"A bid for SGX from Western exchanges cannot be ruled out as they lack the all important Asian footprint," said Jaj Singh, a UBS analyst in Singapore.

But SGX's higher valuations would be a challenge as European exchanges are trading at an average of 11.1 times 2012 earnings and American exchanges at 13.3 times versus SGX's 19 times, UBS estimated in a note last week.

Mark Mobius, executive chairman of Templeton Emerging Markets, suggested SGX could do something with the Hong Kong exchange, Asia's largest listed bourse and a gateway for investors into China.

"A combination of these two would be dynamite," he said.

(Additional reporting by Rob Taylor in Canberra and Sonali Paul in Melbourne; Writing by Lincoln Feast; Editing by Dean Yates)