Tokyo Exchange to buy Osaka bourse, creates world’s No 3 exchange – Business Recorder
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The Tokyo Stock Exchange will take-over its smaller rival in Osaka in 2013 to create the world's third-biggest bourse with listed stocks worth $3.6 trillion, aiming to build scale to cope with a weak home market and compete with a flurry of global tie-ups.

The Tokyo Stock Exchange's $1.7 billion takeover of the Osaka Securities Exchange Co brings together two bourses that have operated separately for more than a century with the exception of a brief merger during World War Two.

The Tokyo market controls more than 90 percent of cash equity trading while Osaka, located in the economic centre of western Japan, draws the top volumes in Nikkei index futures and other derivatives. "This will create a well balanced exchange," said Sadakazu Osaki, a senior researcher and exchange expert at Nomura Research Institute. The combined value of stocks listed on the exchanges would trail only NYSE Euronext at $14.5 trillion and Nasdaq OMX Group Inc at nearly $4 trillion, figures from the World Federation of Exchanges show.

Still, the new exchange lacks a strong international strategy, seen as an important factor for growth since its home market is mired in deflation and has suffered years of economic stagnation. Globally, exchanges have announced $83 billion of mergers and acquisitions over the past five years, rushing to cut costs and diversify in the face of dwindling revenues from the traditional stock trading business and new upstarts.

"The global environment surrounding exchanges has changed dramatically, and the presence of the Japanese markets has been in decline," said Michio Yoneda, chief executive officer of the OSE, told a briefing. "We are up against a big paradigm shift." The two said they would merge operations in January 2013 after the larger but unlisted TSE buys up to two-thirds of the listed Osaka exchange in a public tender offer. The tentative name for the merged entity is Japan Exchange Group, Inc.

The TSE will offer 480,000 yen per share, or a 14 percent premium to Monday's closing share price. The price values the Osaka bourse at 130 billion yen ($1.7 billion). Shares of OSE, where companies such as Nintendo and Murata Manufacturing are listed, rose as high as 5.5 percent before closing up 4.6 percent at 440,050 yen.

The OSE will keep its listing as the surviving entity, though the combined firm would eventually look to re-list on the Tokyo exchange's main board, allowing the TSE to recoup its take-over costs, Tokyo bourse CEO Atsushi Saito said. The merger ratio values the TSE at roughly 1.7 times the OSE, implying a combined market value of 350 billion yen ($4.55 billion), which would put it roughly on par with Nasdaq OMX, the 9th most valuable exchange, according to Thomson Reuters data.

Based on combined profits of the fiscal year ended in March, the Japan exchange would trade at about 19 times past earnings, higher than NYSE Euronext at 11 times but below top operator Hong Kong Exchanges and Clearing Ltd at 24 times. "Trading volumes are weak and they are operating in a shrinking market. Even after the merger there is little hope for a big jump in profits. It doesn't look like an attractive investment," said Ryosuke Okazaki, chief investment officer at ITC Investment Partners.

Saito is due to become chief executive of the new exchange, while Yoneda will assume the post of chief operating officer. Asian stock exchanges have largely stayed out of this year's global exchange consolidation and the only attempted deal - the $8 billion bid by the Singapore stock exchange SGX Ltd to buy the Australian stock exchange ASX Ltd - was blocked by the Australian government.

Talks between the TSE and OSE started in March and hit several snags as the two sides struggled to agree on the merger ratio and the structure of the deal, with the TSE originally aiming to list its own shares before merging. The deal was struck against an increasingly dismal outlook for the Japanese equities market. While new listing have recently picked up slightly, trading volumes are at half of 2007 levels and slumped to a new low for the year last month.

At the peak of Japan's asset bubble in 1989, the Tokyo exchange's market capitalisation accounted for about 40 percent of the value of global markets. It now contributes 7 percent, reflecting Japan's loss of economic position. Japanese exchanges have not been aggressive in seeking out alliances and overseas growth.

Copyright Reuters, 2011

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