JSE in bid to buy Bond Exchange

October 27, 2008 at 12:00 AM EDT

The JSE Ltd (“JSE”) has announced today that following discussions with a number of shareholders of the Bond Exchange of South Africa Limited (“BESA”), it has made a conditional offer to acquire the entire ordinary share capital of BESA for R90 per share which is a premium of 106% to the NAV per BESA share excluding the BESA Guarantee Fund or a small discount of 6% (or R5.43 per BESA Share) to the NAV per BESA share including the Fund as stated in the Rights Issue Circular.  

The JSE’s offer would enable BESA shareholders to realise direct value for the assets of the Fund which they would otherwise not be able to realise since the Fund is not owned by BESA or the BESA shareholders but is contained in a trust and is consolidated only for accounting purposes.

The cash consideration values BESA at R173.22m.

Nicky Newton-King, Deputy CEO of the JSE, said that the proposed deal is intended to create a world-class, unified multi-product exchange that efficiently provides sophisticated trading, clearing and settlement infrastructure to all its clients.

She said it was envisaged that the combined BESA/JSE team would work with all interest rate market participants to develop a vibrant  interest rate exchange which to date has lagged global developments.

“We believe integrating BESA and the JSE is in line with bourse consolidation around the world and would improve our competitive ability in an increasingly international market for securities trading. By keeping an open mind to harness the best of what BESA and the JSE together have to offer, we are confident that we will come up with the best solution for South Africa and the region to build liquidity, provide effective risk management to reduce counterparty risk, and lower costs for participants,” said Newton-King.

Newton-King noted that it is increasingly important to ensure that as far as possible the trading, clearing and settlement in South African financial instruments happens in a globally-competitive manner in South Africa so that local participants and the local economy derive the benefits of a vibrant financial market.

“The South African bond market is too small to have two markets with neither offering what participants really want.”

She said the proper pricing of the interest rate spot market will have a knock-on effect on the interest rate derivatives market:  interest rate futures and options are dependent on efficient and transparent interest rate spot markets.

The JSE expects the bid to be supported by a large percentage of BESA’s shareholders.

“By integrating BESA into the JSE, the exchange expects to be able to grow the interest rate market while reducing the costs for users particularly because of the ability to achieve economies of scale,” said Newton-King. “We’ve got a good track record of sweating our systems for the benefit of our market participants and will apply that to this integration as well.”

The JSE has dropped the average pricing for trading in equities products from R9.55 to R7.89 (or 17%) and the average pricing for trading in derivatives products from R1.24 in 2003 to 78 cents (37%) from 2003 to 2006, despite spending over R253.84m implementing new trading, clearing and settlement technology and growing its post tax profit by 470% during that same period.

“Another important benefit of the integration will be the opportunity to reduce counterparty risk by getting all participants to use the same clearing house and settlement system. The global credit crisis and plummeting stock markets have made investors very nervous about whom they are dealing with. Adequate risk management and transparency are critical to ensuring confidence in any capital market. Having one counterparty to all trades effected in South African financial instruments therefore makes a lot of sense.”

Over the past several years, the JSE and BESA have had numerous discussions to develop a closer relationship.

“These discussions have not been as fruitful as the JSE had hoped, despite what we believe to be compelling synergies between the JSE and BESA.

“As a result, we have not been able to make any meaningful progress towards forging the affiliation sought by market participants which in the end we hope will convince issuers to use their home bourse rather than seek capital offshore,” said Newton-King.

She concluded by saying that the JSE believes the combined expertise of BESA and Yield-X will satisfy the market and its shareholders with offerings to build a powerful bond market.

Further information is available at http://www.jse.co.za/besa-deal.jsp