Stock exchange merger decision could be close

A takeover of the New Zealand Stock Exchange needs to be sweet for Australian shareholders if the deal is to go ahead, writes Australia correspondent BINA BROWN.

A decision could be made soon on whether the Australian and New Zealand stock exchanges should merge.

Australian Stock Exchange chairman Maurice Newman and managing director Richard Humphry will address the board of the New Zealand exchange in mid-February, at the request of the NZ bourse, to help in deciding whether to push ahead with an integrated market.

As requested last August by New Zealand, the Australian exchange has put forward a model outlining a merged entity.

The proposed model, which is subject to confidentiality agreements, was obviously not entirely what the New Zealanders were expecting.

Michael Roche, the Australian exchange's executive general manager of strategic planning, said members of the New Zealand exchange were "confronting the reality" of what a merged entity would look like.

"They are also trying to come to grips [with the fact] that the nice-to-haves from a New Zealand point of view have to be consistent with the point that ... the transaction has to be earnings-per-share positive for the Australian exchange's shareholders."

Australia is just as keen to see a deadline set for any agreement as it is for the merger to proceed.

Further delay in a decision will continue to create uncertainty for Australian shareholders as well as tie up considerable management resources at the expense of other more profitable projects.

Merger or not, the Australian exchange is gaining from new listings and interest in New Zealand stocks as companies move across the Tasman.

By preparing the proposal, Australia has done what it was asked last year. It is now up to the New Zealanders to make the call to proceed.

"Let's remember the idea of the merger was brought up by the New Zealand Stock Exchange," said Mr Roche.

"The NZ exchange has asked whether the chairman and managing director will come over and talk with the board about the model.

"Both sides will get a better idea of the value of pressing on and take stock of whether it is something that is going to gain the necessary support," he said.

"Also whether, upon reflection, it is what NZ wants to do. We are hearing that NZ is focusing more on getting its demutualisation bedded down in the first instance."

Several issues stand in the way of a merger proceeding smoothly or quickly.

First, it needs member as well as parliamentary support.

Then there is the issue of price, the merger of trading and settlement systems and an appropriate system to trade shares in companies from countries with different currencies.

While a joint currency seems to make as much sense as a joint stock exchange, it is still a long way from reality.

Another sticking point may be a regulatory one - whether New Zealand brokers meet Australian licensing conditions or will be "grandfathered" into the Australian market.

"Australian officials have to be comfortable that brokers in New Zealand, or people who call themselves brokers in New Zealand, meet Australian standards," said Mr Roche.

On the issue of systems, a decision has to be made on whether Australia's Seats trading system and Chess settlement system would win over New Zealand's systems.

"The economics of running multiple systems suggests we have to decide on a single platform for trading and settlement," said Mr Roche.

While the addition of the New Zealand exchange would marginally help Australia's weighting in the Morgan Stanley Capital Index, the big winners would be Kiwi companies looking for capital and greater liquidity.

Australia's weighting, accounting for just 1.23 per cent of the MSCI, is not large in every fund manager's portfolio, but then at 0.06 per cent, New Zealand would hardly rank at all.

Combined, the two might just manage to stay on the international fund managers' radar.

CS First Boston analyst Martin Hickling believes a merged entity would give New Zealand's stronger companies greater access to investors, a big reason why several Kiwi companies have moved their primary listing across the Tasman.

Mr Hickling said that even dual-listed stocks had missed out on investor interest by not being included in any of Australia's main indices and by not being able to pay franking credits.

"It would be positive for a company's cost of capital and greater liquidity would lift the ability to raise capital," he said.

Mr Hickling rated the proposed merger as one of the three most important public strategic moves being pursued by the Australian exchange - the others being the co-trading link with the Singapore Stock Exchange, which will go live in July, and the building of a registry platform with Perpetual Trustees.