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Singapore Exchange (SGX) says it is on track to complete a $7.9 billion takeover of Australian bourse operator ASX in 2011, but political obstacles to Asia-Pacific’s first major merger of exchanges remain a challenge.
The comments today came after SGX missed expectations for its second-quarter profit on higher costs for technology and transactions linked to the bid for ASX.
SGX, Asia’s second-biggest listed bourse operator after rival Hong Kong Exchanges and Clearing, reported an adjusted 14 per cent rise in October-December profit and said it would benefit from higher securities and derivatives turnover.
The bid to take over ASX overcame a hurdle last month when it was cleared by the Australian competition regulator.
Yet analysts are mixed about the outcome of the deal, which still needs the approval of Australia’s parliament. Some members of parliament have expressed concern that a foreign takeover would not be in Australia’s interest.
“We believe the deal will probably go through. But even if it goes through it will take a huge amount of management bandwidth, which probably could have been used for turning day-to-day operations of the business,” said Sachin Nikhare, a research analyst with Indian brokerage firm IIFL in Singapore. “The management will have to address concerns about sovereign issues and national interest.”
SGX, which is 23 per cent owned by a state-backed fund, has to convince Australia’s Foreign Investment Review Board that the deal is in the country’s interest.
The deal is expected to go before parliament in Canberra for approval following FIRB’s decision.
SGX said the regulatory process related to its merger with ASX was proceeding as planned.
“We continue to work with the relevant stakeholders, including (Australia’s) Foreign Investment Review Board, with the aim of completing the proposed combination in 2011,” SGX CEO Magnus Bocker said in a statement.
Tom Elliott, managing director at MM&E Capital in Melbourne, said SGX was likely to make concessions, such as offering a couple of board seats, to make the bid more favourable to ASX shareholders.
“Australian shareholders will be happy with the deal, the bigger issue will be getting the Treasurer over the line,” said Elliott. “There’s enough elements in this minority government, so that if it looks too difficult they’ll just say no. And there’ll be a big Foreign Investment Review Board enquiry.”
SGX shares fell about 0.5 per cent, as investors expressed disappointment in the earnings results, before paring losses.
Bocker, who joined the exchange in December 2009 from NASDAQ OMX , has tried to boost trading volumes by rolling out new products such as the American Depository Receipts of top Chinese companies and getting more parties to trade on SGX as Singapore loses out to Hong Kong in the race for mega-listings.
However ADRs have generated lower-than-expected volumes.
“So far the volumes in Singapore are negligible compared to the trading volumes in the United States,” IIFL’s Nikhare said.
SGX earned $S81.7 million ($64 million) adjusted net profit in October-December, compared with $S71.8 million a year ago. If transaction costs related to the merger with ASX were included, net profit was $S74.2 million, little changed from the first quarter.
Analysts had forecast an average $S84.7 million net profit for the company’s second quarter, according to a Reuters survey of five analysts.
Securities market revenue – which was about 47 per cent of total revenue – rose 20 per cent to $S81 million on higher turnover from a year earlier. Derivatives revenue also climbed 8 percent, helped by volumes from options and commodities.
SGX has launched a slew of over-the-counter derivative products such as metals and commodities which could position the bourse as a commodity exchange between China, Australia and the rest of Asia, said CIMB’s Kenneth Ng in a research note.
Technology spending increased 33 per cent to $S25.6 million.