If mega mergers attract megalomaniacs, as some think, then the JSE's bid to merge with the Bond Exchange of SA (Besa) must be seductive to investors who believe the easiest way to a quick buck is by buying into a monopoly.
After 10 years of thwarted efforts, the odds have shortened on a merger after the JSE hiked its initial offer price 39% to R125/share and secured enough shareholder support to make it happen.
With 63% of shareholders now in the bag, and the New Zealand Exchange (which holds 22%) having reversed its initial opposition (it says it "anticipates accepting this revised offer"), it almost looks a shoo-in.
Almost. The final arbiters will be the regulators - the Financial Services Board (FSB) and the competition tribunal - and whether they deem that a monopoly exchange wouldn't hurt SA's capital markets. Steve Meintjes, an analyst at Imara SP Reid, says: "I don't think you can take it for granted that it'll whistle through without a problem. The authorities will have to look at it closely."
In practice the JSE is the only exchange settling equity trades, but in theory the Bond Exchange could begin doing that in competition with the JSE. In 2005, the JSE tried to launch its own fixed-interest product, Yield-X, in opposition to the Bond Exchange.
The authorities will need to ask if merging the only two exchanges capable of competing with each other is in the best interests of the country. In Imara's report on the deal, Meintjes says the JSE was "at pains to point out, no doubt for the benefit of the competition authorities, that bond trading is very competitive, both over the counter and on offshore exchanges".
However, one of the reasons for the deal is to lure back the trades in SA bonds that take place in London and New York. This may convince the authority to give it the green light. Estimates suggest up to 40% of all trading in local bonds takes place offshore.
For traders, the concern is that without any competition to keep it honest, the JSE could hike fees for bond trades. Malcolm Charles, a portfolio manager at Investec bond fund, says: "The salient point for users is what impact this will have on trading costs."
However, Mokgatla Madisha, a bond trader at Investec, says: "If costs got out of control, bond traders could simply trade over the counter (OTC)."
Traders are not the only ones eager to ensure these costs don't rise. "We also don't want [this]," says JSE deputy CEO Nicky Newton-King. "We've committed to keeping Besa's costs at their current levels for two years." She says that if the merger is approved, the JSE can put more trades through its infrastructure, which will allow the fees to drop.
Nicky Newton-King
But some of the Bond Exchange's ambitious plans - such as an interest rate derivatives platform called BondClear that is being developed with the Nordic exchange, Nasdaq OMX - may be scrapped. Newton-King says the JSE plans a "whole review of all the technology and products available to decide which ones to develop... we'll also be reviewing BondClear and [the JSE's clearing system] Safcom.
"But it's far too early to say we'd cancel BondClear. [When we made the offer] we felt that BondClear was an asset to a combined entity," she says.
Besa CEO Garth Greubel says fees were going to change anyway. "After we demutualised, a fee increase was always on the cards," he says.
But if fees were to increase too sharply, people would simply trade bonds over the counter overseas, thwarting the strategy of luring these trades back into SA. Greubel says the exchange realises that it can't adjust prices however it wants.
Even if the deal gets past the competition authorities, is it a good deal for shareholders?
For Besa investors, it seems sweet. The New Zealand Exchange, for one, must be smiling. It bought its 22% in October for R73,17/share, so the offer of R125/share is almost an immediate 71% premium. During a year in which most investments failed to stay simply positive, that's some lucky deal for the Kiwis.
For JSE shareholders, it's more complicated. In the long run, Imara says this deal "is good for the JSE" if it improves trading volumes and products.
But in the short term, the deal is earnings-dilutive, as Besa made a R1,5m loss last year and will make another loss this year.
Based on last year's results for both companies, the deal would have reduced headline earnings by 9,6%. But Newton-King says the partnership will allow Besa to become profitable quicker. "If we hadn't merged, Garth was expecting them to make a profit in only four or five years. By developing the market, we can turn it around earlier."
A couple of things will probably change, starting with the physical premises in Melrose Arch. Though nothing has been decided, it is most likely Greubel's team will move into the JSE's headquarters in Sandton.
Greubel says: "The offer price was a fair value, and we got feedback from the market and they said they really wanted it, so we went with that."
But if trading fees stay constant, the merger probably won't affect trading too much. Econometrix Treasury Management MD George Glynos says he doesn't believe it'll make a huge difference to users of both exchanges.
"One good thing about the JSE is there is a lot of transparency compared with the bond market. If conducted properly, the efficiencies and technology could be good for all the users," he says.
Patrick Mathidi, a portfolio manager at RMB Asset Management, says if the deal allows the JSE to cut trading fees, it'll be worthwhile.
"If we see more products that cut across [bonds and equities] with better pricing, it could attract more investors and improve liquidity," he says. It remains to be seen if the competition regulators agree.
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