Photographer: Adam Berry/Bloomberg

Deutsche Boerse Cautioned Not to Pay Too Much for LSE

  • ICE is contemplating an offer to rival Deutsche Boerse's
  • Some shareholders of Deutsche Boerse see regulatory risk

Some of the biggest shareholders of Deutsche Boerse AG are cautioning management not to overpay for London Stock Exchange Group Plc if a counteroffer emerges, according to people familiar with the matter.

Intercontinental Exchange Inc. is contemplating a bid for LSE, which last week agreed to a deal with Frankfurt-based Deutsche Boerse. The German exchange would get 54 percent of the London-based company it wants to form with LSE. The all-share transaction with Deutsche Boerse values LSE’s equity at 8.9 billion pounds ($12.6 billion), according to data compiled by Bloomberg.

Some major shareholders of Deutsche Boerse accept the logic of joining with LSE to create Europe’s largest exchange operator, but are concerned regulators won’t approve the transaction, according to people familiar with the discussions who asked not to be named because the talks are private. Meanwhile, some major LSE shareholders want Deutsche Boerse to offer more, people familiar with the matter said last week.

“It’s natural for every shareholder, particularly institutional investors, who have a fiduciary responsibility to their investors, to try to get the best price,” said Thomas Caldwell, chief executive officer of Caldwell Securities Ltd., a money management firm in Toronto.

Spokesmen for Deutsche Boerse and LSE declined to comment.

Sweeter Bid

The challenge facing Deutsche Boerse Chief Executive Officer Carsten Kengeter, who’d run the combined company, is balancing demands of LSE shareholders seeking more money while appearing prudent to his own investors. LSE shares closed Tuesday at 2,860 pence, or 12 percent higher than the value of Deutsche Boerse’s current offer, reflecting optimism a sweeter bid will come in.

Investors have shot down deals in the past. Deutsche Boerse tried to buy a smaller version of London Stock Exchange in 2005, but it dropped its bid after shareholders, led by hedge funds, opposed the plan.

Deutsche Boerse’s current deal is funded solely with stock, mitigating issues with its credit rating. In a bidding war, Kengeter’s ability to sweeten the offer with debt would have to be judged against his desire to keep a higher credit rating. Deutsche Boerse is rated AA by Standard & Poor’s, though a downgrade is being considered.

Kengeter said last month that his “war chest is impaired a little.” The exchange spent 725 million euros ($811 million) buying a currency trading platform called 360T and 660 million euros on indexing business Stoxx AG last year. On March 9, Deutsche Boerse agreed to sell its U.S. options exchange for $1.1 billion in cash.

Capital Markets

Intercontinental Exchange CEO Jeff Sprecher said last week that, as a publicly traded company, he has the ability to raise money. “We have access to capital and an expectation by our investors and customers that we’re going to continue to evolve and grow and use those capital markets,” he said at an industry conference. His company owns the New York Stock Exchange and several futures exchanges.

The takeover, or bid, premium in an acquisition is typically about 30 to 40 percent above the pre-bid share price, said John Colley, a professor at Warwick Business School. Deutsche Boerse and LSE describe their deal as a merger of equals.

“It is an opportunity for ICE,” Colley said. “If I were a shareholder in the LSE, I’d feel I was getting sold down the river a bit at the moment.”

The head of LSE endorses the Deutsche Boerse offer.

‘Right Deal’

“I 100 percent support this merger,” LSE CEO Xavier Rolet said in a conference call. “I firmly believe it is the right deal for the shareholders, customers and employees of both LSE Group and Deutsche Boerse AG. I also believe it is absolutely the right time to take this transformative step in histories.”

Regulatory approval is also a worry for investors because those discussions could mean months of uncertainty, potentially creating as downdraft for the companies’ share prices. Should officials block the deal, it would create strategic uncertainty as to how the companies would proceed. Rolet is set to step down if the company combines with Deutsche Boerse, which raises questions about continued leadership if the deal fails.

“I think people are more open to it than they were in the previous attempts,” Caldwell said. “You just don’t know. That can delay it and that obviously represents a risk factor, but it’s an un-quantifiable one.”

Takeover attempts by the German exchange operator failed in 2000 and 2005. Deutsche Boerse’s attempt to buy NYSE Euronext was rejected by the European Commission in 2012. Reto Francioni, who led the Frankfurt-based company at the time, called it a “black day for Europe.”

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