Merging exchanges

Are there any market benefits to merging the stock exchanges of Chile, Peru and Colombia?

The merger of the stock exchanges of Chile, Peru and Colombia is moving ahead at staggering speed. While the transaction still requires regulatory approval, the unified market is expected to start operating in 2023 and achieve full integration in 2024.

A Peruvian asset manager was dismissive, “The integration of these stock exchanges has no real market benefit. This merger will only benefit the owners of the stock exchanges who can reduce costs; it will not improve the liquidity of the markets, it will just reduce costs. They can’t even incentivise Peruvian retail investors to invest in Peru, now they expect them to invest in Colombia and Chile too?”

“The integration of these stock exchanges has no real market benefit. This merger will only benefit the owners of the stock exchanges.”

Asset manager, Peru

Gaining regulatory approval did not appear to be straight forward either, according to the CEO of a large investment bank in Chile, “While there are some operational challenges and shareholder approvals that are still required, I believe that the real threat is the regulatory approval. The current governments of each of the participating countries are less market-friendly than previous leaders, especially in the cases of Chile and Colombia.”

The merger is expected to be completed with the establishment of a holding company, registered in Chile, that will set the unified strategies through a common management of the three exchanges. The Colombian Stock Exchange (“BVL”) and the Santiago Stock Exchange (“BCL”) will control 40% each of the new holding company, while the remaining 20% will be held by the Lima Stock Exchange (“Grupo BVL”).

At the time of the official statement, the integration was based on the valuation of each stock exchange, USD 259 million for Chile; USD 248 million for Colombia and USD 138 million for Peru. The merger will result in a market ranging between USD 700 million and USD 800 million, similar to the size of the Mexico stock exchange.

Despite the valuations, there appears to be a large difference in terms of trading volumes, “Chile has a more developed market that trades USD 150 million a day, Colombia trades USD 30 million and Peru less than USD 10 million.”

“While there are some operational challenges and shareholder approvals that are still required, I believe that the real threat is the regulatory approval.”

CEO, investment bank, Chile

It is hoped that the new holding company will generate growth 47% higher than the sum of the three separate exchanges. It is also expected to increase the development of the regional market by setting common standards of business models and the creation of technological and operational synergies.

Achieving these ambitious targets won’t be easy, according to the investment bank CEO, “Managing the different rules and regulations in each country will be challenging, especially if current governments adopt positions or policies that make stock exchange operations more difficult.”

The next step for the project is to prepare a working plan of the operational model to be sent to the respective nations by November and December 2022. Furthermore, the new holding company will face challenges to design a transitional governance model and define the logistics of its functioning, including a decision on the opening hour of the market, as Chile is two hours ahead of Peru and Colombia.

Longer term, could we see further consolidation of Latin American stock exchanges? The Peruvian asset manager didn’t think so, “There is little incentive for other countries to join the scheme. Argentina is in a long and deep financial crisis, and Brazil and Mexico do not seem to consider it attractive enough to join smaller countries.”

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