Counter Offers

Deutsche Börse Faces Rivals in LSE Bid

Deutsche Boerse headquarters in Eschborn near Frankfurt Source Arne Dedert dpa
Deutsche Börse could see its merger with LSE thwarted by the U.S.-based ICE.
  • Why it matters

    Why it matters

    Deutsche Börse could face its third failed attempt to grow in Europe if rival exchanges succeed in thwarting the merger with London Stock Exchange.

  • Facts

    Facts

    • Intercontinental Exchange owns the New York Stock Exchange and ten other bourses around the world, including derivatives and energy securities platforms.
    • Shares of the London Stock Exchange jumped by more than 7 percent on Tuesday, while those of Deutsche Börse gave up most of its gains on news of the possible ICE counter-offer.
    • Deutsche Börse CEO Carsten Kengeter last week said his goal is to become number one or number two across all major divisions globally.
  • Audio

    Audio

  • Pdf

The Intercontinental Exchange, a U.S-based group that owns 11 stock and securities markets around the world, said Tuesday it may make a counter offer for the London Stock Exchange, which could upend Deutsche Börse’s bid to become one of the world’s top three stock exchanges.

The Chicago Mercantile Exchange, the world’s largest trading platform by market value, is also looking whether it could challenge the Deutsche Börse-LSE deal, people familiar with the matter told news agency Bloomberg. A counterbid for LSE is the most likely option but the Chicago-based exchange may choose not to proceed, Bloomberg reported. CME declined to comment.

Shares of LSE jumped to an all-time high Tuesday, up more than 8 percent to 29.08 pounds, or $40.49, at 2:36 pm London time, after news the ICE, the owner of the New York Stock Exchange, confirmed it was considering a bid.

Deutsche Börse shares gave all their gains from earlier in the day after news of the rival bids broke. The stock was the only decliner in the German blue-chip DAX index, falling 0.2 percent at €76.03 in Frankfurt.

“(The) ICE counter bid for LSE could have very strong chances,” Diego Perfumo, an analyst with Equity Research Desk in London, said in an email to Handelsblatt Global Edition.

Banks would prefer ICE to buy LSE based on previous deals the U.S. exchange operator has made, Mr. Perfumo said. Furthermore, a takeover price of 30 pounds per LSE share, or $14.7 billion in total, could still boost ICE’s 2016 earnings per share by 6.7 percent, if the deal were funded by a share and debt issue, the analyst said.

Last week, Deutsche Börse and LSE announced plans to merge their operations via an all-share transaction that would make it the world’s number two or three trading platform after Chicago-based CME Group and ICE. It marks the third time in the last 16 years that the two exchanges have tried to merge.

If ICE's offer is considered serious by LSE shareholders, Deutsche Börse and the London Stock Exchange may be forced to improve the terms of their all-share transaction.

Frankfurt-based Deutsche Börse already operates the stock exchange in Frankfurt, the derivatives market Eurex and clearing house Eurex Clearing, but has long been looking to expand into new markets. Its ambitions have repeatedly been thwarted either by regulators, shareholders or rivals. ICE gobbled up NYSE after Deutsche Börse’s attempt to merge with the exchange was blocked by European regulators in 2011.

ICE, which is based in Atlanta, on Tuesday confirmed it “is considering making an offer for London Stock Exchange Group.” Bloomberg had first reported the counter bid.

The U.S. exchange operator said no decision had been made on whether to go ahead with its bid, and it had not yet approached LSE’s management board.

Deutsche Börse and LSE were valued at around €27 billion, or $29 billion, based on last week’s market prices, which would make it the second-largest exchange globally. ICE had a market value of €26.6 billion, while the biggest, CME Group, was worth €28.3 billion.

Assuming it doesn’t want to be thwarted again, the question now is whether Deutsche Börse may be forced to improve the terms of its all-share transaction with London-based LSE.

The fusion was presented to investors as a “merger of equals,” with Deutsche Börse holding 54.4 percent and LSE owners the remainder. Management would be equally divided between the two, however, while business divisions will remain in the countries where they are based today.

Deutsche Börse Chief Executive Carsten Kengeter, a former UBS banker, is expected to take the top management position, but the headquarters of the joint holding company would be based in London. Donald Brydon, LSE’s current chairman, has been selected to chair the combined company, with Joachim Faber, chairman of Deutsche Börse’s supervisory board, set to become Mr. Brydon’s deputy chairman and senior independent director. Mr. Kengeter’s current counterpart in London, Xavier Rolet, likely would leave the group if the deal is made.

For now, the German exchange is sticking to its “merger of equals” plan and would consider options once details of a rival offer by ICE were presented, people familiar with the matter told Handelsblatt.

Deutsche Börse said in a statement it was aware of ICE’s interest in LSE and would monitor future developments. “The company continues to conduct its talks to merge with the London Stock Exchange Group,” Deutsche Börse said.

 

029 Deutsche Börse-WTB 2015 resume 01

 

Whether Deutsche Börse has room to sweeten its offer is questionable, however. The German firm has already received pushback from a number of domestic policymakers who argue the “merger of equals” included too many compromises by the higher-valued company.

The two stock market operators specifically outlined their plans last week. The jointly-held holding company would be created above the two stock markets and have its headquarters in London, though Deutsche Börse would maintain its headquarters Eschborn, near Frankfurt, and the LSE its head offices in London. Also, both sides have promised that there will be no changes to where the various business segments are located.

But politicians and regulators are not yet convinced. For example, the exchange supervisory authority of the German state of Hesse, where Frankfurt is located, wants to examine whether the exchange’s Frankfurt-based operations might suffer because of the planned merger.

“Also the seat of a new holding company will be part of the analysis,” people familiar with the matter told Handelsblatt. If deemed necessary, the merger might not be allowed.

Carsten Schneider, deputy chairman of the center-left Social Democratic parliamentary group, said Frankfurt is an attractive location as a financial center and “it must be ensured that it remains so in a merger.”

Mr. Schneider also said it was crucial that business segments with sustained high growth still be located in Frankfurt.

If the LSE deal falls through, it wouldn’t be the first time. Deutsche Börse failed in 2000 and in 2004 to merge with LSE, the second time over objections from key shareholders. The German exchange also bid for NYSE Euronext in 2011, but the European Commission thwarted the plan, claiming it would hinder competition. Two years later, ICE bought NYSE Euronext.

 

Michael Brächer is a financial editor in the investment team in Frankfurt. Donata Riedel covers economic policy for Handelsblatt. Katharina Slodczyk is Handelsblatt’s London correspondent. Christopher Cermak and Gilbert Kreijger, editors with Handelsblatt Global Edition in Berlin, contributed to this article. To contact the authors: braecher@handelsblatt.comriedel@handelsblatt.com  and slodczyk@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!