Thirteen years after the sun finally set on Britain's Asian empire, it is hard to think of an investment in the London Stock Exchange plc as an obvious China play. For triple-A-rated exposure to China, you might consider buying stock in HSBC Holdings plc or Standard Chartered plc, two banks with big historic links to the Far East. Or you might take a riskier punt with an investment in one of the 60 or so Chinese companies listed in London. But you wouldn't put money on the exchange itself. At least, not now. Perhaps that is what LSE chief executive Xavier Rolet is trying to change. The former Lehman Brothers Holdings Inc. banker dropped a broad hint recently that he wants to see the grand old dame of stock markets take a secondary listing in Shanghai. He reportedly told a conference in China's financial capital it was his "deep hope and secret forecast" that the LSE would be allowed to do so before the end of 2011. Whether that's a precursor to selling the LSE altogether remains to be seen.
Listing in Shanghai is an odd move if you want serious, disciplined investors. There are deep pools of money in mainland China just waiting to wash over any Western company that regulators might conceivably allow to list there. But for stability, liquidity and sophistication -- albeit still combined with the old-fashioned Chinese love of gambling -- you might prefer to look to the former British colony of Hong Kong. The U.K. handed Hong Kong back to Beijing in 1997, and it has plenty of exposure to a vast Chinese manufacturing hinterland, much of it controlled by Hong Kong and Taiwanese money. But Hong Kong remains an autonomous region of China with its own currency, its own regulators and a solid British legal system. Alternatively, a listing in Singapore would tap into wider Asian liquidity.
Either of those established markets -- perhaps even a gamble on Shanghai -- could provide a welcome shot in the arm at a time when London is trading at what analyst Sarah Spikes of London brokerage Arden Partners plc describes as a shocking 2010 enterprise-value-to-Ebit ratio of just 7.6 times, compared with 18 times for Hong Kong. So, she maintains, an Asian listing would give the LSE access to an investor base that places a higher value on exchanges than do its domestic investors.
Of course, there may be other motives. The LSE has a history of working in partnership with stock exchanges elsewhere, including its counterparts in Tokyo and Moscow. Rolet knows there are points to be gained with the Chinese authorities by investing in China, setting up joint ventures and showing confidence in the local market. What better way to make a hit with his hosts than trusting his own stock to their domestic investors? Longer term, depending on the evolution of Chinese regulation, he might hope to be in a position to invest the LSE's own money for a share of the Shanghai exchange.
But whatever Rolet's long-term strategy, drawing attention to the London exchange in Asia might attract Asian interest in the LSE. Rolet knows that as well as anyone, as he knows that it would be lunacy to put his company up for sale when it is trading at below 580 pence a share -- its lowest level since April 2009. But unlike his predecessor, Clara Furse, who determinedly fought off bids from Nasdaq OMX Group Inc. and other rival exchanges, Rolet might be interested in selling the exchange at the right price.
Some analysts now believe the price correction of LSE shares has been overdone and that the loss of market share to upstart rival exchanges such as Chi-X Europe Ltd. has probably bottomed out. Spikes, for instance, said in a note in late May that the LSE's recent reductions in transaction charges appears to have delivered market share. She reiterated her 1,000 pence ($14.95) target price for the stock.
Even at that price -- still well below the 1,243 pence a share Nasdaq offered in February 2007, near the peak of the credit bubble -- it might make an attractive buy for the Hong Kong exchange, which could afford to acquire the business outright if it chose. The Hong Kong bourse would find the purchase immediately accretive and would relish the opportunity for a little reverse colonization.
Now there's a transaction that would give the LSE all the Far Eastern exposure it could handle.