The London Stock Exchange has emphatically rejected the Hong Kong bourse's $39 billion takeover offer, opting to stick with its planned deal for data and analytics group Refinitiv
The Hong Kong exchange will now likely have to go hostile and present a better offer directly to LSE shareholders if it wants to keep alive its hopes of becoming a more global player to rival US giants ICE and CME.
The LSE told HKEX in a letter that it had fundamental concerns about key aspects of the proposal which it said had no strategic merit.
It also said that HKEX's relationship with the Hong Kong government would "complicate matters".
HKEX's valuation of the LSE falls "substantially short" and the "ongoing situation in Hong Kong" adds to uncertainty for shareholders, the London bourse added, a reference to weeks of pro-democracy street protests in the former British colony.
"Accordingly, the board unanimously rejects the conditional proposal and, given its fundamental flaws, sees no merit in further engagement," the LSE said in a statement.
LSE's blunt rejection letter said the Hong Kong offer did not meet its strategic objectives.
It said it was sticking with its core strategy of expanding into data with the $27 billion Refinitiv deal, rather than taking a "significant backward step" by bulking up on market transactions in the HKEX proposal.
HKEX's surprise takeover offer, made on Wednesday, had required the London exchange to ditch the Refinitiv acquisition.
The LSE also said a Hong Kong takeover could well be rejected by regulators or governments in Britain, the United States and Italy.
HKEX's assertion that implementing the deal would be swift and certain "is simply not credible", it added.
The London course also owns the Milan exchange and has a significant US presence through its FTSE Russell index subsidiary and LCH, its derivatives clearing house which dominates the US dollar swap market.
The flat rejection indicates HKEX boss Charles Li is unlikely to win the LSE board round with an improved financial offer, meaning if he wants to take it further he may have to go hostile.
If Li wants to come back with a new offer, he will need to launch a major charm offensive with investors to convince them the LSE board is wrong.
However a source close to the LSE said even if the cash component of HKEX's offer was raised, it would simply increase the risk for a combined group by piling on more leverage.
The source said a higher bid by the Hong Kong exchange or going hostile was unlikely to succeed because its proposal was "just too weak on every fundamental point".
A deal will be challenging given the troubled history of big exchange mergers combined with Hong Kong's current political disruption.
The industry has been littered with attempts at cross-border tie-ups for over a decade as profits from the traditional business of running stock markets and clearing houses have fallen.
But proposed deals have collapsed in the face of regulatory and political opposition to core parts of a country's financial system falling into foreign hands.
This has pushed the industry to look for related businesses for growth, with exchanges like LSE and New York Stock Exchange owner ICE instead driving into more profitable and less politically sensitive areas like data and analytics, where revenue is rising.
HKEX made its offer just two days after its officials travelled to London to present it to LSE chief executive David Schwimmer for the first time.
It has been coolly received by shareholders on both sides so far.
Analysts said a perception that Beijing is exerting growing influence over Hong Kong was a key sticking point for an LSE takeover, given the Hong Kong government's close links with the HKEX.
The Hong Kong government is the biggest shareholder in HKEX, with a 6% stake. It approves six of the 13 board members and can also stop any other shareholding rising above 5%.
Hong Kong is entering a fourth month of sometimes violent protests sparked by legislation that would have drawn the former British colony closer to the Chinese legal system.
Fitch Ratings said, before the LSE's rejection of the offer, that "increasing control by Chinese authorities over Hong Kong" could raise regulatory concerns in Britain and the United States about data and information security.
HKEX, for its part, had touted the deal as providing London with a major gateway to the rapidly growing Chinese economy, but the LSE said that HKEX did not provide the best long-term positioning for this.
"We value our mutually beneficial partnership with the Shanghai Stock Exchange which is our preferred and direct channel to access the many opportunities with China," the LSE said.
The LSE and Shanghai have recently launched a share trading link.
Earlier today and ahead of the rejection, HKEX boss Li told Reuters that his proposal was one about boosting the long-term fortunes of both exchanges.
"Whoever can come up with a system that either allows money to go into China or allow the Chinese money to come out is going to really, really transform global financial markets."