Australia intends to reject Singapore Exchange Ltd's proposed $7.8 billion bid for Australia's ASX Ltd on national interest grounds, underscoring the political challenges facing other cross-border exchange deals.

The two exchange operators wanted to team up to cut costs, fight growing pressure from alternative trading platforms and avoid being left behind as rivals in North America and Europe get together.

But Australian Treasurer Wayne Swan, facing growing political opposition to the deal, said on Tuesday he intended to reject the bid after getting advice from the country's Foreign Investment Review Board.

FIRB informed SGX that I had serious concerns about the proposal and that, subject to further consideration, I intended to accept the unanimous FIRB advice that the takeover would not be in the national interest, Swan said.

A final decision had not been made, he added, but share moves showed the market doubted the deal could be saved. ASX shares closed down 3.3 percent, while SGX shares rose more than 6 percent before closing 4.5 percent higher.

If the deal does fail, it will be the latest in a number of cross-border transactions to fall foul of politicians, including BHP Billiton's $39 billion bid for Canada's Potash Corp

last year.

It could also bode ill for other major exchange deals awaiting approval from regulators and politicians.

Last week, Nasdaq OMX and IntercontinentalExchange bid $11.3 billion for NYSE Euronext in an effort to trump Deutsche Boerse's deal, and pushed their case with an appeal to U.S. patriotism.

London Stock Exchange's bid to buy Toronto Stock Exchange operator TMX Group needs to overcome growing opposition from banks and the government of Ontario, the home province of the Toronto bourse.

Governments are getting pretty tough on lots of things,

said Jason Beddow, Chief Executive at Argo Investments. I wouldn't say governments are particularly business-friendly at the moment.

CHASING GROWTH

In Australia and elsewhere, opponents have argued that exchanges are crucial national institutions that should be controlled locally. Other major regional bourses including Hong Kong Exchanges and Clearing <0388.HK> and exchange operators in India have caps on ownership which prevent takeovers.

The ASX bid, code-named Avatar by SGX's bankers, followed years of informal talks between the two exchanges and other operators on potential tie-ups. SGX-ASX would have created the world's fifth largest exchange in terms of the market capitalization of the operators.

SGX hadn't decided whether to drop its bid or pursue further dialogue with the FIRB, but the deal was not dead yet, two sources familiar with the transaction told Reuters.

We will continue to pursue organic as well as other strategic growth opportunities, including further dialogue with ASX on other forms of cooperation, SGX said in a statement.

Chief executive Magnus Bocker told a media conference call the FIRB notification had no criticisms of the merger structure and they had no plans to amend the proposal.

Asia will continue to be the world's growth engine in the decades to come. As a combined entity, SGX and ASX would have been the best placed to have leveraged on Asia's growth and attract more global participation and listed companies, said Bocker, a 49-year-old Swede who made his mark bringing together seven Nordic bourses to form OMX AB.

Analysts said SGX could tie-up with another global exchange if its ASX bid failed.

A bid for SGX from Western exchanges cannot be ruled out as they lack the all important Asian footprint, Jaj Singh, a UBS analyst in Singapore, said before Swan's announcement.

But SGX's higher valuations would be a challenge as European exchanges are trading at an average of 11.1 times 2012 earnings and American exchanges at 13.3 times versus SGX's 19 times, UBS estimated in a note last week.

Mark Mobius, executive chairman of Templeton Emerging Markets, suggested SGX could do something with the Hong Kong exchange, Asia's largest listed bourse and a gateway for investors into China.

A combination of these two would be dynamite, he said.

DEAD DUCK

Rob Oakeshott, a key independent Australian politician who supported the bid, said he wanted to hear why the deal was not in the national interest.

I am also not quite sure who the Treasurer is kidding when he says the ASX-SGX process isn't over. He should call it -- it's a dead duck, Oakeshott said.

And with this merger dead, there is now the headache for the ASX of what to do next in a global exchange market that is consolidating. The ASX is now in grave danger of being left behind.

The Tokyo Stock Exchange, which owns a 4.9 percent stake in the Singapore bourse, said it was watching to see what happened.

While we haven't been pushing the deal, if the result is something that benefits shareholders we are happy to let the deal move forward, said spokesman Kazuhiko Yoshimatsu.

Investors said political hurdles of a SGX-ASX deal were unlikely to be met without radically changing the bid.

Rejection of the deal would give credence to Australia's reputation as a sometime fickle recipient of foreign capital and could raise its sovereign risk profile -- something the nation can ill afford given it runs a chronic current-account deficit and needs foreign capital to develop its huge resources sector.

Swan did not elaborate on his concerns about the bid, but the chief concern expressed by many opponents was the Singapore government's indirect 23 percent stake in SGX.

The FIRB assesses deals on six criteria including the independence of the foreign investor from its government, national security, competition and the economic impact.

The deal would have needed the approval of Australia's parliament to lift a 15 percent foreign ownership cap on ASX. Australia's minority government only holds power with the support of Greens and independents.

The collapse of the deal would be a blow to the banks advising on it. UBS stood to make $23.4 million in estimated fees as the target adviser, while Morgan Stanley as SGX's adviser stood to make an estimated $21.4 million, according to Freeman Consulting Services, a Thomson Reuters joint venture partner.

(Additional reporting by Rob Taylor in Canberra and Sonali Paul in Melbourne, Rachel Armstrong in Singapore and Tim Kelly in Tokyo; Writing by Lincoln Feast; Editing by Dean Yates)

Australia