A  merger,  if  materialised,  will  add  synergies.  Newswire  reported  that  the London  Stock  Exchange  is  in  talks  with  SGX  about  a  potential  merger.  LSE  is understood  to  have  held  a  series  of  informal  conversations  with  SGX  about  a formal tie-up. We would rate a merger positively, as the different time-zone offers synergy, provided the transaction price is within industry norms.  However, given the  uncertainty  of  a  transaction,  and  the  current  weak  SGX  ADT  (averaging S$1.2b  MTD,  compared  with  FY11  of  S$1.64b),  we  re-iterate  our  SELL recommendation with target price of S$5.00, pegged to 17x FY13  EPS, which is minus-one standard deviation from the historical average of 24x.

SGX's  PE  is  double  that  of  LSE.  As  of  19  Jul  2012,  SGX  has  a  market capitalization  of  USD5.7b  whilst  LSE's  is  USD4.4b  (three-quarters  the  size  of SGX).  SGX trades at a current P/E of 24x, whilst LSE is a much lower 11x. The market  speculation  is  that  SGX  will  takeover  LSE  given  SGX's  larger  market capitalization.  With SGX's higher P/E rating, this option is also more appropriate.

Just  a  week  ago,  SGX  signed  a  MOU  with  LSE  to  enable  cross  trading  of  their largest and most actively traded stocks.  This reflects a good working relationship between the two parties, and lends weight to a friendly merger.

Recall that  SGX made an offer to acquire ASX in 2010 but the deal fell through. SGX  may  be  re-looking  at  other  inorganic  growth  opportunities,  such  as  LSE. Pending more details  from either SGX or LSE, it would be difficult to assess the impact of any potential M&A on SGX's share price performance.

Source: OSK