16 March 2016

London Stock Exchange agrees merger with Deutsche Boerse

The London Stock Exchange and Deutsche Boerse have put the speculation of the last few weeks to bed by officially agreeing terms on a deal being described as a merger of equals. The parties issued a joint statement on 16th March, a few weeks after rumours of the proposed combination emerged. The transaction is to be implemented through the establishment of a new UK holding company known as UK TopCo, which will acquire both exchanges, although the existing framework of all entities within the combined business will remain unchanged and the enlarged business will maintain headquarters in both London and Frankfurt. Upon closing, which is expected to follow by the end of 2016 or during the first quarter of 2017, shareholders in the London Stock Exchange will own 45.6 per cent of the combined entity while Deutsche Boerse investors will hold 54.4 per cent. UK TopCo is expected to list in both London and Frankfurt at a later date.

Deutsche Boerse chief executive Carsten Kengeter has high hopes for the deal, saying it will strengthen European capital markets by reinforcing the link between London and Frankfurt and building a network across the continent with Luxembourg, Paris and Milan (LSE acquired Borsa Italiana for EUR 1.61 billion in October 2007), thereby creating a European player which will be able to compete on a global scale. The parties also believe both businesses’ growth strategies will be accelerated as a consequence of the merger, which is expected to generate value for shareholders. In addition, the combination is being touted as an attractive offering to both US and Asian companies looking for access to investors and capital.

According to Zephyr, the M&A database published by Bureau van Dijk, there were 17 transactions featuring securities and commodities exchanges as both buyer and target signed off during 2015. The most valuable of these also involved Deutsche Boerse, which paid USD 675 million to buy the remaining 49.9 per cent stake in Stoxx and the remaining 50.1 per cent of Indexium from SIX Group in July. Others targeted include Chi-X Canada, which Nasdaq agreed to pick up for USD 72 million in December. That deal completed early last month. Nasdaq president Hans-Ole Jochumsen said the purchase was a big part of the group’s North American strategy as the target handled around 22 per cent of S&P/TSX Composite securities order flow in Canada. For his part, Chi-X Global chief executive said the move would enable the target to take advantage of new product and asset class opportunities. Other stock exchange operators targeted over the course of the year included Bolsa de Comercio de Santiago, Sankt-Peterburgskaya Birzha and ALTX Africa.

The proposed merger of Deutsche Boerse and the London Stock Exchange has already been on the cards for a few weeks; on 23rd February the parties confirmed that negotiations were underway with a view to reaching an agreement on a merger of equals, as reported on Zephyr at the time. However, the pair were quick to caution that there was no guarantee of a deal being reached and pointed out that any transaction would require the green light from regulatory bodies and shareholders of both exchanges.

Since that announcement there have been a few other developments; on 1st March IntercontinentalExchange, the owner of the New York Stock Exchange, issued a statement in response to press speculation, confirming that it was considering a bid for the London Stock Exchange. At the time the prospective suitor stated that no approach had been made and it had not yet made a final decision on whether to proceed with an offer. IntercontinentalExchange gave no indication of how much it would be willing to pay if it did opt to go ahead with a bid. The NYSE owner has yet to make any statement in the wake of today’s deal announcement.

There is plenty of history between the London Stock Exchange and Deutsche Boerse with regard to a proposed combination and the companies have been linked a number of times in the past. Back in 2000 the parties agreed terms on a deal, but the transaction ultimately fell apart following a hostile bid for the London Stock Exchange from OMX, which was then known as OM Gruppen. OMX’s bid also failed to proceed after receiving only 6.7 per cent of acceptances. The London Stock Exchange and Deutsche Boerse were again linked in December 2004, when the latter submitted a new offer for its UK peer, only for the bid to be rejected.

The newly announced transaction between the pair is not the only deal featuring a stock exchange as both buyer and target to have been signed off recently; just last week Nasdaq agreed to buy US-based International Securities Exchange Holdings from Deutsche Boerse for USD 1,100 million, to be financed using debt and cash-on-hand. Closing of that transaction is expected to follow during the second half of this year, subject to the go ahead from regulatory authorities. Kengeter said Deutsche Boerse is offloading the unit, which it bought in 2007, in line with plans to become number one or two in all of its business areas, meaning that it must consider options for divisions with which it feels it cannot achieve this goal.

© Zephyr