Dear readers,

Stock exchanges have long lost their human traders. Yet those places are still where the thrills and spills of business leaders’ endeavours converge. Lex’s daily agenda is often set by share price moves. This week a spurned £32bn bid for the London Stock Exchange from Hong Kong Exchanges and Clearing dominated our line-up.

The surprise of the announcement was all the greater given civic unrest in Hong Kong and Brexit chaos in the UK. “Audacious” and “bold” were words journalists chose to describe the transaction. Lex concluded more soberly that the proposed deal was “uncompelling”.

Exchanges’ revenue growth drivers these days are data, the clearing of that and derivatives. Even so, these institutions remain national institutions. That was why other mergers often failed. Despite its multiple distractions, the UK government would not meekly nod through a takeover, Lex reckoned. A deal would also require LSE dropping its $27bn agreed deal to buy Refinitiv, the financial information provider. Lex had described that deal as a “win-win”.

More pertinently, HKEX proposed paying less than a quarter of the price for LSE in cash. The rest would be in volatile HKEX stock. “Sadly, Hong Kong unrest means HKEX looks more like a refugee than a gatekeeper to fast-growing Asia,” we wrote. LSE formally rejected the deal on Friday but a better offer could emerge.

A day after revealing its bid, HKEX received a boost from news that brewer Anheuser-Busch InBev had revived plans to list its Asia-Pacific business on the Hong Kong stock exchange. Nevertheless, if he wants an LSE bid to succeed, Charles Li, HKEX’s chief executive, will have to persuade London investors that there are big opportunities in an east-west collaboration, and that HKEX could continue attracting initial public offerings from large Chinese businesses. “If Charles Li needs a beer to weep into, [AB InBev’s] Budweiser would be the appropriate brew,” Lex suggested helpfully.

Stock market market listings mark different stages in the life cycles of companies. This week Peloton, the US home fitness start-up, unveiled plans for an IPO valuing it at as much as $8.1bn. Lex was sceptical. There would be nothing wrong with its losses widening, provided Peloton was “not pedalling hard but going nowhere”. The problem is that four-fifths of revenue come from equipment sales. “Longstanding customers, however loyal, are not going to buy new bikes or treadmills every year,” Lex said.

Shares in Cairn Energy, the oil explorer, rose 12 per cent this week after it upgraded its production outlook. But they have not benefited as much as might have been expected from higher energy prices. “Climate change now peeves portfolio managers as much as tree-huggers,” Lex noted. Rivals such as Tullow and Premier were suffering similar investor ennui. Increasingly, production in the UK’s North Sea was financed by private capital. “If explorers follow the same pattern, the value of a public listing will become moot,” we concluded.

Environmental activists have pegged oil producers as the equivalent of cigarette makers. Tobacco companies, meanwhile, suffered a setback to their attempts at reinvention. US president Donald Trump unexpectedly announced plans for a crackdown on vaping, an alternative to traditional smokes that tobacco groups are keen to develop. The threat for British American Tobacco, for instance, is that a ban on menthol flavours in vaping products could be a harbinger of a broader ban. BAT announced plans this week to cut a fifth of senior staff. Possibly the risks to their businesses are priced in, Lex wrote. “Even so, the latest health concerns over vaping pose a threat to the investment case,” we said.

The business models of ride-hailing services Uber and Lyft faced a different challenge when California passed legislation reclassifying gig workers as employees. Both companies had flagged risks related to the employment status of drivers when they listed this year. Nevertheless, the timing was unfortunate for them, we said. Their shares have traded well below their respective listing prices and both are under pressure to cut costs.

Lex was not impressed by ideas for sidestepping the new rules. Nor was leaving California an option. More to the point, measures that improve worker protection do not distort free markets if they are applied fairly. Raising pay rates would maybe slow revenue growth. “The upside is that rival ride-hailing companies face exactly the same costs,” we concluded.

Whatever kind of markets you plan to visit, Lex wishes you a relaxing weekend.

Ralph Atkins
Lex writer

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