Friday 19 January 2018

Exchanges shrug off Brexit fears to trade €30bn merger contracts

The London Stock Exchange
The London Stock Exchange

Jonathan Gould and Huw Jones

Germany's Deutsche Boerse and London Stock Exchange agreed to combine in a $30bn deal to create a European trading powerhouse better able to compete with US rivals encroaching on their turf.

But the deal, which marks a third attempt to link the Frankfurt and London exchanges, may prompt a takeover war after New York Stock Exchange owner Intercontinental Exchange said it may bid for the British group.

Nearly 16 years after Deutsche Boerse first tried to take over LSE, the exchanges said last month they were discussing an all-share merger, which they confirmed yesterday would give Deutsche Boerse shareholders 54.4pc and LSE investors 45.6pc of a new company.

This offers a unique opportunity for Frankfurt which has always played second fiddle to London as a global financial centre, something recognised by the German government which said it would welcome the deal if it strengthened Frankfurt.

If it goes ahead, the combination would create the world's biggest exchange by revenue, forecast at €4.7bn this year from stock, bond and derivatives trading, indices, market data, and clearing and settlement.

The exchanges sought to sell the deal to investors with the lure of annual cost savings of €450m.

They also promised users - the banks and fund managers who pay fees to trade and companies who pay to be listed - "substantial benefits", but gave no figures.

And in a clear effort to win over Europe's politicians to the benefits of a dominant pan-European exchange, Deutsche Boerse chief executive Carsten Kengeter said it would enable Europe to enhance its capital markets.

This chimes with European Union plans for a "Capital Markets Union" to compete better with the United States and Asia.

Kengeter said Germany's Bundesbank and Frankfurt-based European Central Bank will "really appreciate" the boost to Frankfurt as a financial centre.

"With this transaction Deutsche Boerse is halting its decline in market share that has been on the cards for a number of years," Kengeter said.

He shrugged off concerns over the impact of Britain, Europe's biggest financial centre, voting to leave the EU.

Deutsche Boerse has been under constant pressure because Europe was the "natural space" for expansion for North American and Asian rivals, with the deal providing the critical mass needed for Germany and Europe overall to fight back, he added.

Despite these incentives, the deal faces questions over Britain's EU referendum in June and whether regulators including in Brussels will approve a huge presence in derivatives clearing. (Reuters)

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