Lon­don Stock Ex­change, Deutsche Bo­erse agree on merger

The Pak Banker - - MARKETS/SPORTS -

Deutsche Bo­erse AG suc­ceeded in its third at­tempt to ac­quire Lon­don Stock Ex­change Group Plc. The deal would cre­ate a ti­tan of Euro­pean trad­ing as long as reg­u­la­tors give it their bless­ing and ri­val suit­ors don't scup­per the agree­ment.

While the com­pa­nies de­clared it a merger of equals, Deutsche Bo­erse stock­hold­ers will get 54.4 per­cent of the en­larged group in the all-share agree­ment, and Ger­man bo­erse Chief Ex­ec­u­tive Of­fi­cer Carsten Kengeter will run the en­larged busi­ness. The board will be equally split be­tween di­rec­tors from LSE and Deutsche Bo­erse.

The com­bined ex­change op­er­a­tor would be the world's big­gest by rev­enue with a mar­ket value of about $30.5 bil­lion.

"It's the right deal for the share­hold­ers, cus­tomers and em­ploy­ees of both LSE Group and Deutsche Bo­erse," LSE Group Chief Xavier Ro­let said in a con­fer­ence call. "It is ab­so­lutely the right time to take this trans­for­ma­tional step in our his­to­ries." Ro­let will step down if the deal is com­pleted.

The dealmakers, Kengeter and Ro­let, share a Wall Street pedi­gree with stints at Gold­man Sachs Group Inc. Pre­vi­ous takeover at­tempts by the Ger­man ex­change op­er­a­tor failed in 2000 and 2005.

The merged en­tity would jump to the top ranks of ex­change oper­a­tors, join­ing CME Group Inc., In­ter­con­ti­nen­tal Ex­change Inc. and Hong Kong Ex­changes & Clear­ing Ltd. The trans­ac­tion could be de­railed by com­pe­ti­tion con­cerns, and it may also have to sur­vive bids from other ma­jor ex­change com­pa­nies. In­ter­con­ti­nen­tal Ex­change, which is known as ICE, has said it is con­tem­plat­ing mak­ing a higher of­fer for LSE.

The An­glo-Ger­man busi­ness would be a pub­lic lim­ited com­pany in Lon­don, with joint head­quar­ters and list­ings in Lon­don and Frank­furt. "They're be­ing very, very care­ful to po­si­tion this as a merger and a merger of equals," said Scott Moeller, a pro­fes­sor of cor­po­rate fi­nance at Lon­don's Cass Busi­ness School and a for­mer in­vest­ment banker. "It's very close to be­ing what a text­book merger of equals would look like."

The com­bi­na­tion would gen­er­ate cost sav­ings, or syn­er­gies, of 450 mil­lion euros ($499 mil­lion) ev­ery year af­ter the deal is com­pleted, the com­pa­nies said in a state­ment on Wed­nes­day. Firms typ­i­cally spend dou­ble their fore­cast an­nual sav­ings from syn­er­gies in the first year or two of a deal, Cass data show. That means they have to find the cash to save money later on.

The new ex­change op­er­a­tor will have a dom­i­nant po­si­tion in Europe from which to ex­pand into both Asia and the U.S. It will be a pow­er­house for clear­ing listed de­riv­a­tives in Europe and over-the-counter con­tracts. The Euro Stoxx 50 In­dex, the FTSE 100 In­dex and the DAX In­dex will be un­der one roof.

The com­pa­nies' clear­ing­houses are cen­tral to the trans­ac­tion. The in­sti­tu­tions stand be­tween buy­ers and sellers to re­duce the dam­age caused if one of them de­faults. LSE and Deutsche Bo­erse's clear­ing­houses will not be phys­i­cally com­bined, Ro­let said. Their reg­u­la­tory over­sight will also re­main un­changed with the data cen­ters and their man­age­ment re­main­ing sep­a­rate.

Deutsche Bo­erse has a siz­able fu­turescle­ar­ing busi­ness, while LSE is the ma­jor­ity owner of LCH.Clear­net, the world's big­gest clearer of swaps. Bring­ing the clear­ing­houses to­gether would al­low cus­tomers to re­duce the over­all col­lat­eral they hold at the two in­sti­tu­tions, sav­ing them money. The process is called cross-margin­ing.

"If you com­bine them, then in a margin­ing fash­ion, not in a le­gal fash­ion, by one be­com­ing a mem­ber of the other and vice versa, then what you are able to do is you are able to re­duce the mar­gin for off­set­ting trans­ac­tions," Kengeter said.

Port­fo­lio margin­ing has be­come a fo­cal point for banks since 2008. Reg­u­la­tions on both sides of the At­lantic have pushed more de­riv­a­tives trades to clear­ing­houses. The in­ter­con­nec­tions be­tween banks dur­ing that cri­sis nearly took down the broader fi­nan­cial sys­tem. By putting a clear­ing­house be­tween the coun­ter­par­ties, the risk posed by a de­fault be­comes more trans­par­ent and more man­age­able. Greater safety means greater cost for banks be­cause clear­ing­house mem­bers must pro­vide col­lat­eral to back up their trades. LCH is de­vel­op­ing a port­fo­lio-margin­ing ser­vice called Spi­der to launch in the first half of the year.

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