22 January 2006

The Independent: Deutsche Börse and Euronext warned over merger proposals

Advisers to the Deutsche Börse and Euronext have told the two European stock market groups that any merger plans would have serious “execution risk”. Hedge fund Atticus, which has built a 9.1% stake in Euronext and has a large shareholding in the Börse, has been urging the two groups to merge. This would scupper Euronext’s attempt to take over the London Stock Exchange (LSE), which has been held up by a Competition Commission investigation.

The UK regulator will decide next month whether to accept Euronext’s undertakings to cut its shareholding in clearing and settlement business LCH Clearnet in order to be allowed to make an offer for the LSE. Macquarie Bank of Australia has also bid for the LSE, but its 580p-a-share offer is far from on the money as bid speculation has sent the LSE’s shares soaring to 690p, valuing it at Pounds 1.75bn.

It is understood that lawyers advising both Euronext and the Börse have told them that the European Commission would have severe concerns about a merger. The largest problems would come because of the Börse’s clearing and settlement side, Clearstream. Brussels warned Clearstream two years ago about abuse of its market position, and a merger with Euronext would potentially lead to more customers being routed through Clearstream by its owners.

“The Competition Commission could see no alternative to divestment and it is difficult to see how the European Commission could come to a different view,” said Ian Rose, a competition partner at lawyers McDermott Will & Emery, which is not advising any parties to the bid battles.

The Börse has said in the past that it would not want to sell Clearstream as this would seriously harm its business model and revenue. New chief executive Reto Franceoni, who took over after Werner Seifert was ousted, has not indicated he wants to alter that position.

Another potential concern about the two companies having a dominant position in exchange traded derivatives - as they own the two leading derivatives markets in Europe, Liffe and Eurex - is not thought to concern the competition regulators. They see derivatives as an international business with most of it traded off market.

The other sticking point would be the location of the headquarters. The Börse wants a combined group to be run out of Frankfurt, but Euronext thinks that would alienate the international banking community and so has proposed Amsterdam.
By Jason Nissé

© The Independent