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'Brexit' would scupper London, Frankfurt stock exchange merger: Deutsche Boerse

Friday, February 26, 2016 - 23:39

[FRANKFURT] Frankfurt stock exchange operator Deutsche Boerse revealed Friday that in the proposed tie-up with the London Stock Exchange the merged group would be based in the British capital, but a potential 'Brexit' could jeopardise the plans.

Deutsche Boerse's chief executive Carsten Kangeter would assume the role of CEO of the combined company if the tie-up goes ahead, the German company said in a statement outlining the rationale and key points behind the proposed merger.

The latest proposal is the third attempt at merging Europe's two biggest markets, but it comes at a politically sensitive time as Britain is due to hold a referendum on June 23 which would determine whether it remains in the EU.

Both stock exchanges recognised that any vote by Britain to leave the European Union could put the entire merger project at risk.

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The London Stock Exchange and Deutsche Boerse had first announced they were in talks on February 23, just three days after British Prime Minister David Cameron secured a deal with the EU for reforms aimed at keeping the UK in the bloc.

Giving details of the planned tie-up, the German exchange said "the potential merger would be structured as an all-share merger of equals under a new UK holding company".

Under the terms of the deal, Deutsche Boerse shareholders would end up with 54.4 per cent of the new holding company's capital, and LSE shareholders with 45.6 per cent. Both financial markets would continue doing business under their respective current brand names.

The LSE and Deutsche Boerse "would become intermediate subsidiaries of the combined group. The existing regulatory framework ... would remain unchanged, subject to customary and final regulatory approvals." The combined group would also be listed on both the London and Frankfurt stock exchanges.

"It is envisaged that the combined group shares would be eligible for inclusion" in the blue-chip stock indices, EuroStoxx, DAX and FTSE.

The combined group would have headquarters in London and Frankfurt, "with an efficient distribution of corporate functions in both locations," the statement continued.

The board of the merged unit would have "equal representation" from both sides.

At completion, LSE chairman Donald Brydon would become chairman of the combined group.

Kengeter, CEO of Deutsche Boerse, would assume the role of CEO and executive director of the combined group while LSE's finance chief David Warren would be chief financial officer.

"On completion of the transaction, Xavier Rolet will step down from his role as CEO of LSE," the statement added.

In addition, a joint committee had been set up to advise on the implications of the outcome of Britain's upcoming referendum on EU membership, Deutsche Boerse said.

But it was "recognised that a decision by the United Kingdom electorate to leave the European Union (a 'Leave Decision') would put the project at risk," the statement said.

Most major British companies and multinationals based in the UK are opposed to a Brexit.

Edison Investment Research analyst Peter Thorne argued that since both the financial infrastructure business in which the stock exchanges operate was increasingly global, as was the regulatory environment, "it should be most unlikely that Brexit would remove the merits of the merger." Nevertheless, any possible British exit from the EU would be a political decision and the deal's financial logic would not be the only concern, he cautioned.

The latest project is the third attempt to combine the London and Frankfurt stock exchanges.

In 2000, similar plans were blocked by the LSE's owners. And a second attempt in 2004 - when then rival Euronext had made a competing bid - the British hedge fund, The Children's Investment Fund (TCI), also derailed the plans.

For its new proposal, Deutsche Boerse has until March 22 to launch the operation, pending shareholder approval and the green light from regulators.

Deutsche Boerse said that both sides believed 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." There would be "significant customer benefits" and "substantial" cost and revenue synergies, Deutsche Boerse argued.

In Frankfurt, investors appeared little impressed, however, with Deutsche Boerse shares underperforming the overall market, adding around one per cent while the blue-chip DAX index gained more than two per cent.

By contrast, in London, LSE shares were up 1.52 per cent while the overall FTSE was up 1.29 per cent.

AFP

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