UK Edition
London Stock Exchange in merger talks with German rival
Shares in the London Stock Exchange Group have spiked after the exchange operator confirmed £20bn merger talks with Deutsche Boerse, a decade and a half after the two rivals last tried to combine their businesses.
LSE Group said it was in "detailed discussions" with the German exchange about an all-share merger that would leave its investors owning 45.6pc of the company.
Both exchanges have been on buying sprees since their last attempt to merge failed in 2005, and now hope to create the biggest market player in Europe, while teaming up their derivatives trading and clearing arms to cut costs.
"The boards believe that the potential merger would represent a compelling opportunity for both companies to strengthen each other in an industry-defining combination, creating a leading European-based global markets infrastructure group," the company said.
The pair have until March 22 to make a formal proposal to shareholders, or walk away under Takeover Panel rules.
The planned deal is the latest overture in a wave of consolidation in the world’s stock exchanges. LSE Group, led by Xavier Rolet since 2009, has acquired the Turquoise trading platform, the clearing house LCH.Clearnet and the market data outfit Russell in recent years to supplement its stock exchanges.
However, it abandoned a £2.3bn merger with Toronto-based TMX in 2011 after shareholders in the Canadian firm raised concerns.
Investor trading in equities has been subdued since the financial crisis in 2008, prompting exchanges to seek revenue growth in new areas such as over-the-counter derivatives and market data streams.
The pressure to build scale has also come from growing interest in alternatives such as the investment banks’ dark pools, where large trades can be made away from the rest of the market.
“The market shares of most major exchanges in Europe have fallen to 60pc as they have lost share to alternative venues over the past eight years,” said analysts at UBS, who said LSE and Deutsche have been the quickest to broaden out their business.
The prospect of a tie-up between Deutsche Boerse and the LSE has been in contention for more than 15 years. In May 2000, they announced plans to merger to form a new company named iX. The deal came as exchanges around the world were trying to consolidate, and LSE soon attracted a rival offer from the Swedish firm OM.
After these deals collapsed, both Deutsche and the LSE chose to go public and list their own stock on the exchanges they ran.
Deutsche returned in 2004 with a new takeover proposal, but this £1.3bn tilt was resisted by LSE management and scuppered by shareholder dissent.
The merger spree has continued more recently, with Deutsche encountering resistance from the European Commission over its attempt to merge with NYSE Euronext, which was blocked last year.
“Strategically it makes sense. Deutsche and the LSE are probably the two biggest and most successful within Europe,” said Delphine Currie, a partner in the corporate finance team at the law firm King & Wood Mallesons.
“It would make both of them more viable on a global scale, and in terms of what’s happening in Europe with plans for a capital markets union, they would be a clear frontrunner in that market.”
Lord Hill, the British Conservative peer serving as the EU commissioner for financial stability, is working to build a unified capital markets by 2019 to give firms across Europe access to equity and debt financing, with the hope of City firms playing a major role.
However, a tie-up between LSE and Deutsche is yet to be finalised and could face competition scrutiny, along with the uncertainty of Britain’s status within the EU.
“Whilst the share price of both exchanges appear to be reacting positively to the merger talks, we believe that those numbers may still need to reflect the complexities of the City of London being outside of the European Union in the case of a possible Brexit and how well discussions with European anti-trust authorities develop,” said JP Urrutia, European general counsel for the equities brokerage ITG.
“The anti-trust issue may be an obstacle as we have seen how Brussels rejected earlier proposals regarding the Deutsche Boerse and NYSE Euronext combination.”
Shares in LSE Group jumped by as much as 15pc after Reuters published a report on the latest merger talks. Deutsche Boerse shares also rose. At the market values before the deal was announced, the enlarged group would be worth about £20bn.
Takeover advisers at Robey Warshaw are working with the London exchange, while Perella Weinberg is working with Deutsche.