By Andrew Bulkeley in Berlin –
Talks over a takeover of London Stock Exchange plc by Frankfurt’s Deutsche Börse AG are raising the prospect of competing bids as European rivals work to beef up volume and slash costs.
The LSE agreed Monday, Dec. 13, to the talks after spurning a £1.35 billion ($2.58 billion) approach from the Frankfurt exchange.
The talks are a remarkable reprise of the exchanges’ ill-fated merger agreement in 2000. That deal went down in flames after British brokers and corporations rebelled and Stockholm’s exchange crashed the party with a hostile bid for the LSE. The LSE’s chief executive, Gavin Casey, was eventually forced to resign to placate his exchange’s angry customer-owners.
“Whoever wins, London will become, by far, the No. 1,” said Olaf Kayser, an analyst with Landesbank Rheinland-Pfalz, in a note. “This should launch a bidding war, and one can assume Deutsche Börse will sweeten its offer.”
Deutsche Börse has been on the prowl since the summer, when takeover discussions with its Swiss counterpart failed. Higher volume would allow the exchange operator to cut costs and offer customers one-stop shopping while offsetting stagnant trading volume at home. A purchase would also win the German group the title of Europe’s biggest stock exchange and a stronghold in Europe’s financial capital.
Goldman, Sachs & Co. is advising Deutsche Börse, while Merrill Lynch & Co. is handling financial details for LSE. Spokesmen for both companies refused to divulge legal advisers.
In the 2000 deal, Goldman and Deutsche Bank AG advised the Frankfurt exchange and Merrill and Schroder Salomon Smith Barney, now part of Citigroup Inc., advised the LSE. Frankfurt’s legal advisers were Hengeler Mueller and Norton Rose then. LSE’s law firms were Herbert Smith and Clifford Chance LLP.
All eyes are now on Paris-based Euronext NV, the next-biggest rival, which operates exchanges in Amsterdam, Brussels, Lisbon and Paris. The group refused to comment on any approach but has always been seen as a potential suitor for the LSE. Last year it took over Britain’s clearing house.
Deutsche Börse said it offered 530 pence per share, equivalent to a 23% premium to Friday’s close, in the offer that the LSE rejected.
LSE’s shares closed up 26.6% at 540 pence Monday. A year ago they traded as low as 328 pence.
In a statement Monday morning, the LSE said the offer was too low but indicated its willingness to form partnerships: “The board of LSE firmly believes that the proposal undervalues the company and the substantial synergies that would be available from the combination of LSE with another major exchange group,” it said.
The LSE is a much smaller, more narrowly focused business than its continental counterparts, deriving the great bulk of its income from equities trading. Deutsche Börse and Euronext, by contrast, operate the Continent’s main clearing and settlement businesses, and Deutsche Börse sells trading software.
LSE also has only limited futures trading business. In 2002, Euronext beat out the LSE in the bidding for the main British futures market, the London International Financial Futures and Options Exchange. And Deutsche Börse has linked with the SWX Swiss Exchange to run Eurex, the world’s largest futures exchange.
Consequently, while the LSE is the pre-eminent equities market in Europe and the only one that draws substantial numbers of foreign companies, its revenue and profit are only about one-quarter those of Deutsche Börse.
In the first half, Deutsche Börse saw net income grow 2.6% to €144.6 million ($191 million) as revenue rose 5.1% to €738.1 million.
In its fiscal first half, which ended Sept. 30, the LSE’s net income rose 4.5% to £34.8 million as sales rose 5.2% to £125.8 million.
Euronext had full-year revenue of €991 million in 2003, or 2.7 times the LSE’s £250 million in the year ended March 31.
The LSE has benefited over the past year, however, from a wave of more than 200 IPOs this year on its secondary market, the Alternative Investment Market, while the Continent has seen few IPOs.
As exchanges linked to single countries, the LSE and Deutsche Börse are rarities in Europe’s trading landscape. Euronext is the main exchange for Belgium, France and the Netherlands, while the Norex Alliance has linked most Scandinavian exchanges including OMX AB’s Stockholm and Helsinki, Finland, floors as well as bourses in Copenhagen; Oslo; and Reykjavik, Iceland.
Deutsche Börse CEO Werner Seifert also appears to have learned from his mistakes. The earlier merger failed in part because brokers and companies fretted over plans to move all blue-chip trading to London with all midmarket and technology shares trading hands in Frankfurt, then home of the super-hot Neuer Markt. Big German companies were uncomfortable at the thought of being traded only in London, and midcap British industrial companies — a substantial proportion of all listings on the LSE — complained that the exchanges had neglected them in the race to divvy up the tech and blue-chip prizes.
At the time, the exchanges could not say what German laws would apply to British companies traded there or vice versa.
The current proposal envisions a less radical reordering of the trading landscape. “It is Deutsche Börse’s intention to preserve the existing market structures, including established market models and existing trading currencies as well as the regulatory frameworks in both markets,” the company said. London trades in pounds, while Frankfurt shares trade in euros.
Analysts Konrad Becker from Merck Finck & Co. in Munich cautioned this could cut into synergies resulting from the deal, which were last time pegged at £60 million a year, and, like most analysts, expects a sweetened bid.
Source: The Deal