(Bloomberg) -- London Stock Exchange Group Plc Chief Executive Officer David Schwimmer can count on some powerful allies if he decides to fend off Hong Kong Exchanges & Clearing Ltd.‘s $36.6 billion bid for his marketplace.

While the offer represents a vote of confidence in London as a post-Brexit financial hub, officials in the U.K. and U.S. are likely to look skeptically at the world’s biggest venue for handling interest-rate swaps being so closely linked to China.

“This news comes at a hugely sensitive political moment,” said Scott Colvin, head of public affairs at Finsbury, a corporate public-relations firm. “This plays into the Brexit debate, the imminent general election, and relations with both the U.S. and China.”

Speaking to reporters from Hong Kong, Charles Li, HKEX’s chief executive officer, sidestepped a question about exploiting the weak pound, which has declined almost 20% since the 2016 Brexit vote. Instead, he touted the benefits of enabling two-way capital flows from East to West, “bringing together significant financial centers of Asia and Europe” and facilitating an 18-hour trading day.


For its part, the LSE has already pinned its future on a world dominated by data with its $27 billion bid for Refinitiv, the business that used to be Thomson Reuters Corp.’s financial and risk unit. It’s currently owned by a Blackstone Group Inc.-led consortium.

After the HKEX bid was announced, an LSE statement called the offer an “unsolicited, preliminary and highly conditional proposal” and said a further announcement would be made in due course.

LSE senior managers were blindsided by the offer, said a person familiar with the situation who asked not to be named discussing matters that aren’t public. Internally, recent meetings have concentrated on the significant benefits of the Refinitiv deal, the person said.

With global political tensions rising -- including protests in Hong Kong and U.S. President Donald Trump’s trade war with China -- commercial arguments may not be the most compelling. U.S. regulators last year rejected a bid by a Chinese-linked consortium to take over the Chicago Stock Exchange, a deal that then-candidate Trump blasted when it was announced in 2016.

‘Security Implications’

In London, U.K. Business Secretary Andrea Leadsom said the U.K. would “look very carefully” at anything with “security implications.” The British political class may also be unwilling to court controversy given the drama over delivering Brexit.

To be sure, Britain has sought closer financial ties with China and the U.K.’s biggest bank, HSBC Holdings Plc, generates more than half its profits in Hong Kong.

“The U.K. and even Theresa May went to China after the Brexit referendum was over, trying to lure them into a trading agreement,” said Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies. “Why would the U.K. all of a sudden oppose this?”

Political Risk

Keefe Bruyette and & Woods analysts led by Kyle Voigt said in a note that the HKEX bid has higher political risks than the Refinitiv deal, and that LSE shareholders who view the Refinitiv transaction favorably see value creation well above the offer price. It said that the 14.5% premium to Friday’s close wouldn’t be attractive enough for shareholders to walk away from Refinitiv.

Schwimmer said in public comments in June that he believed nationalist interests made cross-border exchange mergers nearly impossible.

Louis Capital analyst Ben Kelly said he didn’t expect a deal to be consummated, citing likely political opposition over national security concerns.

History is littered with failed attempts to complete cross-border exchange mergers including at least three attempts by the LSE to combine with Deutsche Boerse AG. The final plan to sell LSE to Deutsche Boerse to create a $30 billion behemoth fell apart when regulators blocked the deal in 2017.

  • Singapore Exchange Ltd.’s $8.8 billion bid for ASX Ltd. collapsed after the Australian government said the deal wasn’t in the national interest.
  • European Union regulators vetoed Deutsche Boerse and NYSE Euronext’s plan to create the world’s biggest exchange after concluding that the merger would hurt competition.
  • Nasdaq OMX Group Inc. and Intercontinental Exchange Inc. abandoned an unsolicited bid for NYSE Euronext in 2011.

“The U.K. government may not wish to see such a vital symbol of U.K. financial-services strength, and indeed a strategic asset, to be owned by foreigners,” said Neil Wilson, chief market analyst at Markets.com. “One rather feels U.K. shareholders will be looking at the glass half empty as far as exposure to Hong Kong goes right now.”

--With assistance from Silla Brush and David Hellier.

To contact the reporter on this story: Viren Vaghela in London at vvaghela1@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, James Hertling, Keith Campbell

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