09 April 2006

Observer: LSE in 'merger of equals' talks with Euronext

The London Stock Exchange and Paris-based bourse Euronext have held secret talks about a nil-premium all-shares merger to create a European 'super exchange' valued at around Pound 6bn. Detailed discussions have taken place between Euronext's financial adviser Morgan Stanley and Merrill Lynch, representing the LSE.

The plan could be put before shareholders at Euronext's annual meeting on 23 May. It is understood that many of the LSE's shareholders are supportive of the project in the absence of a more lucrative cash bid from an American rival such as the New York Stock Exchange.

The LSE's shares are currently trading at 1037p, but sources say that in the event of a merger with Euronext, London would be valued at about £12 a share and that its chief executive, Clara Furse, would be offered the opportunity of continuing to run the LSE from its UK base.

An analyst said: 'There is a view that consolidation of exchanges will come in two phases: first in Europe and then another wave would involve transatlantic takeovers between continental bourses and their US counterparts.'

A nil-premium merger, meaning that Euronext would acquire the LSE for its market price, could be billed as a 'merger of equals' as Euronext is to hand over £1.4bn to investors via a share buy-back. This would reduce its market capitalisation to a level closer to London's.

An LSE shareholder said: 'It's not a bad plan, especially when you consider there are synergies between these two groups that would produce savings - and deliver an uplift for shareholders who remain invested in a merged company.'

Euronext, which first signalled it was interested in London more than a year ago, has already identified ��m of cost savings, but that figure is reckoned by analysts to be a conservative estimate.

The advantage of a combination of the LSE and Euronext is that it achieves one of London's biggest objectives: to bolster its presence in the fast-expanding derivatives market by allying itself with Euronext's Liffe, the London financial futures exchange.

But a serious obstacle to a tie-up between LSE and Euronext, which operates exchanges in Paris, Amsterdam, Brussels and Lisbon, is that a block of Euronext shareholders, speaking for at least 20 per cent of its equity, are pushing for a merger with Deutsche Borse, operator of the Frankfurt exchange. Talks between the Germans and French have been going on for several weeks, but last week Euronext said it was looking at the possibility of other partnerships.

A day later, the LSE said it was reviewing its options following its rejection last month of a 950p-per-share cash bid by US technology exchange Nasdaq

By Richard Wachman

© The Observer