Finance

Edward Evans is a managing editor with Bloomberg Gadfly. He is former managing editor for European finance at Bloomberg News.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Calling Carsten Kengeter. The Deutsche Boerse CEO needs to get moving if he wants to maximize his chances of securing his proposed merger with the London Stock Exchange.

Deutsche Boerse's Problem
Its market value is treading water, making its all-stock proposal for LSE less attractive
Source: Bloomberg data

The German exchange faces possible competition from Intercontinental Exchange, which said on Tuesday it is considering its own offer for the LSE.

Unlike its German rival, U.S.-based ICE could offer a meaningful premium in exchange for full control, and give the company a chance to expand in U.S. capital markets. To prevail, Deutsche Boerse will need to come up with a convincing figure for cost cuts and a more attractive equity story.

In the proposed Anglo-German merger, LSE shareholders would get 45.6 percent of the combined entity, consistent with where the two companies' shares traded in recent months. That means LSE's shareholders would benefit from just under half the value created from any deal as it emerged. That has to be the key selling point, given the absence of an upfront premium and the decision to give the CEO role to the Deutsche Boerse side.

LSE’s market value rose 16 percent, to 9.3 billion pounds, between the Anglo-German merger proposal becoming public and ICE's declaration of interest. Since then, LSE's market value has jumped to 10.1 billion pounds, taking the gain to 25 percent -- more reflective of market expectations of an auction. With Deutsche Boerse’s value little-changed at 14.7 billion euros, its proposed terms now look pretty weak.

ICE's Size
The U.S. exchange's market value dwarves its European competitors
Source: Bloomberg data
Note market values converted to dollars on March 1, 2016

Both ICE, worth $28 billion, and Deutsche Boerse can doubtless wring cost savings out of the LSE by consolidating platforms and IT. Neither side has given a number yet. For ICE, these savings could plausibly fund a premium to be paid in both cash and shares -- although it has been talking about wanting to cut leverage, with net debt running at approximately three times Ebitda. It can also lay claim to expertise in deal integration having acquired NYSE Euronext for $10.3 billion in 2012.

For the LSE, competing interest may help ensure its shareholders receive full value. CEO Xavier Rolet is offering to retire, so the standalone option is looking less credible now.

As for Deutsche Boerse, it has the advantage that it has already started talks and agreed governance. That kind of early momentum and display of management harmony matters in M&A -- especially when there are big regulatory hurdles to clear.

But its unenthusiastic share price isn’t helping. If Deutsche Boerse can flesh out its vision in more interesting detail, and keep the LSE on side, it can at least snarl up ICE's attempt to gatecrash its talks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Edward Evans in London at eevans3@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net