• Deal could scramble industry with 4 of top 5 companies in mix
  • Consolidation would leave losers in proposed deal far behind

A fight for control of London Stock Exchange Group Plc could get bare-knuckled as potential buyers jockey for dominance in an industry that’s quickly consolidating.

After LSE said it was in merger talks with Germany’s Deutsche Boerse AG, the two largest exchange owners in the world, CME Group Inc. and Intercontinental Exchange Inc., or ICE, may step in with unsolicited offers.

With four of the world’s top five exchanges in the mix, a deal has the potential to scramble the industry. A purchase would give CME a commanding presence in Europe after it struggled to succeed there on its own. If ICE prevails, the combined entity could put more than $10 billion in market cap between itself and CME. And an LSE-Deutsche Boerse merger would create a company big enough to challenge CME’s market-leading $32 billion valuation.

Such stakes could make for a heated bidding war, said Michael Wong, an analyst at Morningstar Inc. in Chicago. “I can see it being contentious,” Wong said. “Everyone has something to gain, and arguably they’ll be blocked from stronger competitive positioning if they’re not the acquirer of LSE.”

To the victors go the biggest equities exchange in Europe, a majority stake in the world’s largest clearinghouse for interest-rate swaps and a profitable index business. The losers, meanwhile, would be left to sweep up what’s left.

Major Players

Fear of missing out is a big factor as the three trading venues circle the prize. LSE Chief Executive Officer Xavier Rolet said last year that the market would one day be dominated by four or five global players.

Xavier Rolet
Xavier Rolet
Photographer: Simon Dawson/Bloomberg

Whatever the outcome, Rolet, a banker who spent most of his career at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. before joining LSE in 2009, insists that London remain one of the world’s go-to trading hubs.

The assets Rolet has amassed at LSE make a strong case for the U.K. capital. In addition to its role as the premier London equities market, LSE controls a majority of LCH.Clearnet Group LLC, which holds $282 trillion of cleared interest-rate swaps as of March 3.

LCH Stake

The LCH stake is attractive to both ICE and Deutsche Boerse because it’s “something neither of these companies have,” said Paul Gulberg, an analyst at Portales Partners LLC in New York. 

While both ICE and Deutsche Boerse offer futures trading, ICE currently has no ability to clear interest-rate swaps and Deutsche Boerse’s Eurex exchange could dramatically increase its rate swap clearing. The private derivatives make up the largest part of the $553 trillion over-the-counter market.

The LCH component “is very important,” said Darrell Duffie, a Stanford University finance professor. “It’s a huge advantage” to be able to offer customers both futures and swaps clearing, he said.

Also attractive to buyers is LSE’s FTSE Russell index, the benchmark for nearly $10 trillion in assets. The index added 45 percent to LSE’s information-services revenue after the 2014 acquisition of the Frank Russell Co.

Deal Flurry

“Information services is a very strong part, if not one of the strongest parts, of the LSE,” said Jonathan Goslin, an analyst at Numis Securities Ltd. in London. “It’s a high-quality business with a high level of recurring income and good visibility on where profits should trend.”

A flurry of deals has created the handful of titans overseeing much of the plumbing for global trading. Atlanta-based ICE, with exchanges and clearinghouses in the U.S., Canada, Singapore and London, shows how, in the age of electronic trading, geographic proximity is no longer required. 

CME Group acquired its way to the top spot among the world’s futures exchanges. It was created when Chicago Mercantile Exchange bought the Chicago Board of Trade in 2007, and then a year later purchased the New York Mercantile Exchange. The company will hold internal meetings this week to decide whether to pursue LSE and has enlisted the help of Credit Suisse Group AG, people familiar with the matter said.

One Stop

A tie-up between Frankfurt-based Deutsche Boerse and LSE would create the largest European market in equities, derivatives, indexes and clearing with a market value of about $30 billion. It could give customers a one-stop shop for primary markets in London, Frankfurt and Milan, as well as access to a pan-European stock venue called Turquoise. The transaction, which has a March 22 deadline for Deutsche Boerse to make an official offer, would also gather the Euro Stoxx 50 Index, the most valuable equity benchmark in Europe, and FTSE Russell’s portfolio of indexes under one roof.

ICE hasn’t approached LSE’s board about a deal, it said in a March 1 statement. While the firm is aware it may face political and corporate pushback if it tries to break up the European marriage, ICE has concluded that LSE shareholders can be persuaded by a higher offer, people familiar with the deliberations said. A combined ICE and LSE would have a market value of about $42 billion, dwarfing CME.

Regulatory Approval

Regulatory approval for any deal may be a roadblock. In 2012, European Union regulators vetoed the planned merger of NYSE Euronext and Deutsche Boerse because they said it would create a “near-monopoly” in European exchange-traded derivatives. They may be more sympathetic to a Deutsche Boerse bid for LSE because it would formally connect London to the rest of Europe, Wong said.

“A number of participants in our industry, which is an infrastructure industry, are moving toward globalization,” Rolet said in an interview last year. “That’s where the growth is, and we’re participating in that.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE