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Tokyo, Osaka exchanges unveil merger plan

by Laura Board | Published November 22, 2011 at 9:15 AM

Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co. Ltd. Tuesday, Nov. 22, unveiled the terms of a long-awaited merger that would strengthen Tokyo's position as the world's third-largest exchange by the value of stocks listed.

The deal, which the companies began working toward around March, marks a domestic response to a wave of bourse mergers worldwide, led by Deutsche Boerse AG's planned $9 billion-plus takeover of NYSE Euronext.

It aims to improve the companies' proposition by combining Tokyo's strength in cash equities with Osaka's derivatives expertise and addresses two decades of stuttering Japanese economic growth, which has crimped equity valuations and Tokyo's role as a financial hub.

"The environment surrounding the companies is characterized by increasingly fierce competition among exchanges across borders caused by the rapid development of information and telecommunications technology, which has resulted in advanced financial trading systems that allow companies and investors to choose among the world's markets the market with the best environment for procuring or investing funds," the companies said.

The transaction starts with the unlisted Tokyo offering ¥480,000 per share for up to two-thirds of Osaka. That values the smaller exchange's equity at ¥129.6 billion ($1.68 billion) and represents a 14% premium to Monday's closing price.

But the companies, which say they are striving to maintain a "spirit of equality," add additional levels of complexity, with internal splits of each company's operating subsidiaries from parent entities preceding the ultimate absorption of Tokyo for about ¥197.4 billion in stock by Osaka, which will remain the surviving entity.

Once the so-called absorption-type merger is complete, the merged entity expects to trade as Japan Exchange Group Inc. TSE president and CEO Atsushi Saito will be CEO of Tokyo Exchange Group, while Osaka president Michio Yoneda will be chief operating officer. The companies expect cost synergies of about ¥7 billion a year

No dates have yet been set for the multiple steps in the process, and the expected time frame is protracted.

The companies have set a deadline for the commencement of the tender offer of Dec. 31, 2012, and a target date for completion of the merger of Jan. 1, 2013. The staged transaction requires a raft of regulatory approvals, company agreements for the steps which follow the tender offer and stockholders' consents.

Tokyo Stock Exchange postponed an initial public offering in 2005 and then again in 2009. It was established in 1878 and has existed in its present form since 2007. In 2000 it acquired the Hiroshima and Niigata exchanges, and a year later it demutualized.

Osaka's heritage dates to the late 1600s when the city became the center of Japan's rice trade. The exchange, which owns Tokyo-based Jasdaq Securities Exchange Inc., earned full-year net profit of ¥9.16 billion in the year ended March.

Mitsubishi UFJ Morgan Stanley Securities Co. Ltd., Nomura Securities Co. Ltd. and Daiwa Securities Capital Markets Co. Ltd. advised Tokyo on the tender offer price and the merger valuation.

The Osaka's advisers on those matters were Goldman Sachs Japan Co. Ltd., SMBC Nikko Securities Inc. and Moelis & Co. UK LLP.

Tokyo is also taking advice from J.P.Morgan Securities Japan Co. Ltd. and law firms Nagashima Ohno & Tsunematsu and Davis Polk & Wardwell LLP, while Osaka retained Merrill Lynch Japan Securities Co. Ltd. and Mizuho Securities Co. Ltd. and law firms Nishimura & Asahi, TMI Associates and Sullivan & Cromwell LLP.

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