Time is running out on efforts by Reto Francioni and Duncan Niederauer to win approval for the merger of Deutsche Boerse AG and NYSE Euronext.
The chief executive officers met in New York today, seeking to overcome opposition to their plan for building the world’s biggest exchange operator. Niederauer said in a message to employees that European Commission antitrust regulators appear likely to block the transaction, according to a transcript obtained by Bloomberg.
Concessions offered by the exchanges to allay competition concerns didn’t go far enough and the EC was likely to prohibit the deal, negotiators informed the companies at a Dec. 21 meeting in Brussels, two people familiar with the talks told Bloomberg at the time. Losing the transaction would cap 15 months of futility in exchange combinations after nationalist outcry and antitrust concern prevented the completion of more than $37 billion in announced takeovers.
“There would definitely be some backlash because they were very confident that the deal would be done,” said Tim Hoyle, director of research at Radnor, Pennsylvania-based Haverford Trust, which manages $6 billion and owns NYSE Euronext shares. “I personally would not blame the management, would not blame Duncan, for this happening. The EU is very tough to game and prognosticate.”
Niederauer, in a video presentation to employees, said regulators’ analysis of the takeover by Deutsche Boerse is fundamentally flawed, and vowed to fight to complete the deal.
“We have not received a formal decision from DG Competition, but it certainly appears, if you look at all the news reports, that the preliminary conclusion they have reached will be to recommend that the proposed merger with DB be prohibited,” Niederauer said. “We’re going to continue to press our case directly with various commissioners in the EU.”
Niederauer and Francioni have been working since February to convince authorities that their agreement won’t stifle competition in derivatives. Richard Adamonis, an NYSE spokesman, said in an e-mailed statement that the meeting ended.
“The parties used the occasion to reaffirm their commitment to the proposed merger and to working together to persuade the European Commission of the strong benefits that our combination will bring to a broad set of stakeholders in Europe,” the statement said.
The companies still have room to maneuver. Commissioners from each EU country vote on a final decision after receiving the case team’s advice, which is non binding.
“That’s the stage at which there may be lobbying,” Stuart Richards, a London-based lawyer specializing in antitrust issues at Fasken Martineau LLP, said in a phone interview. “They could say this isn’t a positive step for Europe at the moment with the economic problems it has, and that it would be detrimental to not allow the deal to go ahead. However, it’s rare that a recommendation isn’t followed.”
NYSE slipped 0.1 percent to $27.77 in New York trading today. Deutsche Boerse fell 0.9 percent to 41.63 euros.
“Deutsche Boerse and NYSE Euronext have not received yet an official decision by the European Commission regarding the requested merger,” Deutsche Boerse spokesman Frank Herkenhoff said in an e-mailed statement yesterday.
Deutsche Boerse agreed to acquire NYSE Euronext on Feb. 15 for stock worth $9.5 billion. The value of the acquisition has fallen 31 percent as opposition mounted and stocks around the world tumbled. Germany’s DAX Index is down 16 percent since the discussions were first reported Feb. 9.
Terms of the merger call for Deutsche Boerse to exchange shares worth $25.21 for each NYSE Euronext share, based on their closing prices. Today’s gain lifted NYSE stock to 10.2 percent above the offer. The gap reached almost 12 percent on Jan. 6, the widest since May, data compiled by Bloomberg show.
“Fundamental investors see the value in a deal not going through,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon Plc, said in a phone interview. “Those people may be coming back in because they’ll see the value is potentially much higher than where it’s currently trading.”
Scrutiny of the proposed acquisition has been greatest in Europe where it would unite the region’s two biggest derivatives exchanges, NYSE’s Liffe and Deutsche Boerse’s Eurex. In the U.S., trading in interest-rate, agricultural and commodity futures is dominated by one company, Chicago-based CME Group Inc., after it merged with the Chicago Board of Trade in 2007 and the New York Mercantile Exchange in 2008.
The takeover would put more than 90 percent of the European exchange-traded derivatives market and about 30 percent of the region’s stock trading in the hands of one company. Deutsche Boerse’s Eurex is the region’s biggest derivatives exchange, with products including fixed-income futures, while Liffe is the second-largest. Eurex is owner of New York-based International Securities Exchange, which has a 31.5 percent stake in Direct Edge Holdings LLC. Brokers own the rest.
“I don’t think people are surprised that there are delays at the last second, but the facts are a lot of people were betting that this deal would go through,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4.5 billion, in a phone interview. “Sensitivities are high and even if it makes economic sense in some cases, that’s not enough to seal the deal.”
In Europe, the companies have offered capping fees on derivatives trading and clearing for three years, selling NYSE’s Liffe single-stock derivatives business, and the licensing of the Eurex trading system to a third party.
The takeover was cleared by the U.S. Justice Department on Dec. 22. U.S. regulators, who in May blocked Nasdaq OMX Group Inc. from pursuing a hostile bid for the New York Stock Exchange owner, agreed to allow the purchase by Frankfurt-based Deutsche Boerse as long as the company sells its stake in Direct Edge, another U.S. equity market.
Six proposed transactions involving public companies totaling $37 billion failed to close in the past year, the most for any 12-month period, data compiled by Bloomberg show. Russia’s Micex Exchange acquired RTS Stock Exchange on Dec. 19 for $1.5 billion, according to data compiled by Bloomberg. Exchanges completed $28.7 billion of deals in 2007 and 2008.
The 25-company Bloomberg World Exchanges Index fell 19 percent in 2011, twice the loss for the MSCI All-Country World Index. The gauge of market operators has averaged gains of 35 percent a year between 2003 and 2010, falling only in 2008. More than $21 billion was erased from the market value of exchanges worldwide in 2011 as deals were delayed or blocked from Sydney to Toronto and New York, Bloomberg data show.
“The investment community is getting a little bit impatient,” Peter Kovalski, a money manager who owns NYSE Euronext shares at Alpine Woods Capital Investors LLC in Purchase, New York, said in a telephone interview. His firm manages about $6 billion. “Personally I would like to see this get complete. It’s been disruptive for both management teams. They’re spending a lot of their time.”