Merger of stock, bond exchanges looms

The unification of the Philippines’ stock and fixed-income exchanges is finally taking shape as the two bourses, with much prodding from financial regulators, have agreed to restart discussions with the aim of formalizing an engagement within a 90-day period.

The Philippine Stock Exchange and the Philippine Dealing System Holdings Corp. (PDS Group) are back in “serious” talks and this time, their leaders have committed to the government that they would come up with a workable framework and sign a memorandum of understanding (MOU) within 90 days, several sources privy to the discussions confirmed to the Philippine Daily Inquirer.

The PSE mandated JP Morgan as financial adviser on the proposed transaction, noting that the American investment bank was very familiar with the equities bourse and its balance sheet. “They (JP Morgan) will do a valuation study,” one PSE source confirmed.

For its part, PDS tapped Maybank ATR Kim Eng Financial Corp. to value its financial market infrastructure and advise it on the prospective merger with PSE. PDS is the holding firm for fixed-income trading platform Philippine Dealing and Exchange Corp. (PDEx), Philippine Depositary and Trust Corp. (PDTC) and Philippine Securities Settlement Corp. (PSSC).

“We have a 90-day timetable to get things done,” one PSE source said. “We’re confident this will happen this time around.” The source added that the prospective transaction was the reason why the PSE was now seeking a substantial increase in its authorized capital.

Although the framework has yet to be finalized, the PSE is preparing to have enough shares to use as currency for a prospective merger through a share-swap deal. Last week, the PSE’s board approved an increase in the bourse’s authorized capital to 120 million shares from 97.8 million with a par value of P1 a share partly to cover a stock dividend declaration equivalent to 12.21 million shares.

But at present, the PSE has issued only 61.26 million out of its 97.8 million authorized capital stock, which means it has ample leeway to cover its latest stock dividend declaration. A check with several sources from the PSE and the Bankers Association of the Philippines (BAP)—the single-biggest controlling stockholder group in PDS with a 27-percent interest—confirmed that the PSE was preparing for a merger-and-acquisition (M&A) activity involving PDEx.

One possibility was to pursue a plain merger between the two bourses while another scenario was for the PSE, being the more established exchange, to buy PDEx, one PSE source said. In either case, the PSE would use its shares to swap with the other shareholders of PDEx. The unified bourse could be called something like the “Philippine Exchange,” the source said.

The PSE owns 20 percent of PDS while Singapore Exchange Ltd. owns another 20 percent.

Banking sources said the new BAP leadership headed by Rizal Commercial Banking Corp. president Lorenzo Tan has started to work with the PSE on the MOU.

What is different this time is that regulators—the Department of Finance, the Securities and Exchange Commission and the Bangko Sentral ng Pilipinas—will be closely watching the progress of the unification.

Finance Secretary Cesar Purisima said last month that he would like to see the merger happening during the term of President Aquino. For Purisima, it does not make sense to have two separate exchanges for stocks and fixed-income instruments. A unification is seen boosting volumes and unlocking huge savings in maintaining and continuously enhancing financial market architecture.