Singapore Exchange, which agreed yesterday to buy Australia’s main stock-exchange operator, was downgraded by JPMorgan Chase & Co., Credit Suisse Group AG and Deutsche Bank AG. The stock slumped to a five-week low.

JPMorgan reduced SGX to “neutral” from “overweight,” citing the vulnerability of its share price to regulatory issues related to the bid for ASX, and the higher indebtedness that would result. Credit Suisse cut its rating to “underperform” from “outperform,” saying ASX’s growth profile makes it unappealing.

 

The enlarged company would oversee two separate markets with almost US$2 trillion ($2.59 trillion) of shares, making it better able to compete with Hong Kong and Tokyo, and electronic trading platform Chi-X Global Inc, which plans to open in Australia in March. The cash-and-stock deal, worth A$8.09 billion ($10.4 billion) as of yesterday’s closing prices, faces regulatory scrutiny in both countries.

 

“The price SGX offered is a bit shocking,” said Mark Tan, a Singapore-based fund manager at UOB Asset Management, which oversees about $12 billion including Singapore Exchange shares. “Australia is a mature market with slower growth potential yet such a big premium was offered. Perhaps that’s the only way they can convince shareholders to agree to the deal.”

 

Singapore Exchange shares closed 2.6% lower at S$8.72, the lowest level since Sept. 22. That extended a 6.2% drop yesterday, the biggest decline in two years, when the deal was announced. A reduction in the stock lowers the value of the transaction’s stock component.

 

The proposed takeover is more than twice the average premium of buyouts among publicly traded financial companies around the world in the past 12 months, according to data compiled by Bloomberg.

 

The reasons for the merger are “not compelling given integration risks, financial leverage and the absence of clear revenue upside potential,” Andrew Hill, a Deutsche Bank analyst, wrote in a report yesterday. He cut his rating on Singapore Exchange to “hold” from “buy.”

 

ASX shares, which jumped 19% yesterday, fell 7.4%, the most in 20 months, to A$38.67 in Sydney today as political opposition to the agreement mounted.

 

The Greens Party, whose votes Prime Minister Julia Gillard needs to pass legislation, “will not be facilitating or supporting this takeover,” leader Bob Brown told reporters today in Canberra, while opposition treasury spokesman Joe Hockey said the offer was “of great concern.”

 

The Monetary Authority of Singapore will study the details of the merger proposal when they are submitted, it said in an e- mailed statement today. The central bank’s Financial Sector Development Fund has a 23.5% non-voting stake in Singapore Exchange through a holding company.

 

“We expect SGX to trade on ebb and flow of regulatory stance on merger rather than volumes traded,” the JPMorgan analysts led by Harsh Wardhan Modi wrote in a report dated yesterday. “Despite accretive bottom-line on debt-funded deal, we expect the stock to decline.”

 

ASX CEO Robert Elstone said yesterday at a media briefing in Sydney that the merger was in the interests of both countries, and that the companies are confident that they’ll win regulators’ approval.

 

“Both parties appear to have done the groundwork with regard to regulatory approvals required in both countries,” Credit Suisse analysts led by Anand Swaminathan wrote in a report today.

 

Even so, the rationale for SGX’s bid, valued at A$8.4 billion when it was announced, is “unconvincing” they said. “ASX is not attractive in terms of profitability and growth profile. It is also set to face stiff margin pressure due to competition.”