Continuing the consolidation of the world’s stock exchanges, the Australian Stock Exchange Ltd. and Sydney Futures Exchange are proposing a merger.

The ASX and SFE Corp. Ltd. announced that they have agreed on a proposed merger to create one of the leading financial markets exchange in the Asia-Pacific region. The combined company would be the ninth largest listed exchange group globally, leaping past the TSX Group Inc.

The merged company will be owned up to 40.2% by former SFE shareholders and 59.8% by existing ASX shareholders. Based on current market values, the merged group would be valued at up to A$5.3 billion. The deal requires approval from the Australian Competition and Consumer Commission and the Federal Treasurer.

Under the terms of the proposed merger, to be effected by a scheme of arrangement, SFE shareholders will receive 0.51 ASX shares per SFE share. The proposal values each SFE ordinary share at A$16.93. This represents a 25% premium to the volume-weighted average SFE share price for the period March 10-21. Alternatively, SFE shareholders will be able to receive A$2.58 cash per SFE share plus a variable ratio of ASX shares per SFE share such that the value of the cash and share alternative is equivalent to the all-share proposal, immediately prior to the scheme meeting.

Following the merger, ASX intends to undertake a capital management initiative of up to A$100 million in cash to all existing and new shareholders, subject to tax advice and any necessary approvals. This will exceed and supersede ASX’s previously announced A$50 million capital return.

The firms say that the combined group will have a broader product mix and greater financial and operational scale than either entity can expect to possess alone. Also, they note that it will provide critical mass upon which to expand equity and equity index futures business. The combined group will also be better positioned to participate in global and regional exchange consolidation. They also expect it to deliver synergies and provide a better platform for product innovation.

In the medium term, ASX expects annual cost synergies in the order of A$14 million to A$18 million by the year ended June 30 2008. For the longer term, “whether and to what extent further cost synergies exist, will be the subject of detailed work by the integration team,” it says.

SFE managing director and CEO, Robert Elstone, said, “This is a great opportunity to enhance Australian capital markets, driving liquidity and market efficiencies to the benefit of all participants and shareholders.”

“SFE has provided substantial benefits to its stakeholders since its demutualisation in August 2000. A merger with the ASX on the terms proposed is a logical progression and is supported by the SFE board,” added the SFE’s chairman, Rick Holliday-Smith.

The ASX’s chairman, Maurice Newman, said, “The logic supporting this initiative is compelling. The businesses uniquely complement each other. Combined, they create the leading, integrated financial markets exchange in the Asia-Pacific region, able to punch above its weight in the global capital markets. This merger will have significant benefits for both sets of shareholders and all market participants, and the time is now right.”

“This is a strategic merger which will deliver a broader range of product, deeper management expertise and greater financial scale,” noted ASX’s managing director and CEO, Tony D’Aloisio. “We congratulate SFE’s Board and CEO for what they have achieved at SFE in growing a great company.”

ABN AMRO Corporate Finance is acting as financial advisor to ASX and UBS AG is acting as financial advisor to SFE.

($A1 = 83¢ Canadian)