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.

London Stock Exchange has told shareholders they should accept Deutsche Boerse's offer of a merger. It's a good starting point -- but still leaves room for another party to disrupt the plans.

London Calling
LSE shares have climbed amid Deutsche Boerse's approach
Source: Bloomberg data

For both exchanges, their prospects as a combination look better than they would be separately. The union will generate 450 million euros ($500 million) of annual pretax cost savings within three years of the deal being completed, the companies said on Wednesday.

Those savings are worth about 3.1 billion pounds upfront, capitalizing them at 15 times and adjusting for tax and implementation costs.

The terms give LSE shareholders 45.6 percent of the enlarged company and Deutsche Boerse the remainder -- no premium, and consistent with the duo's relative value before talks leaked.

LSE shareholders' slice of the synergies would be 1.4 billion pounds, roughly 4.10 pounds per share. Add that to LSE's share price before the deal and the stock is worth about 29 pounds.

In addition, LSE shareholders would share in nearly half of the future value created by a jumbo exchange with vast strategic options -- something that's hard to put a value on at this point.

Still, this may not be the best deal for the LSE.

Governance is a snag. Both sides are making an equal contribution to the board, with the LSE providing the chairman and Deutsche Boerse the CEO. Seeming balance may be a hindrance: savings can be easier to extract when one side of a deal is in the driving seat. The deal's risky concentration in clearing may also alarm regulators, making approval less than certain.

LSE shares dipped slightly to 28.97 pounds on the confirmation of the deal, while Deutsche Boerse climbed 0.9 percent to 76.46 euros. While LSE still trades at a premium to Deutsche Boerse's offer, the slight decline suggests investors are somewhat less confident of an auction for the group. That's rational: the Deutsche Boerse plan has momentum and LSE has recommended it to its shareholders.

But the deal isn't obviously strong enough to scare off the LSE's other clear suitor, InterContinental Exchange, from intervening with a full-blown takeover bid.

ICE, which already owns the London International Financial Futures and Options Exchange, ought to be able to find enough synergies to justify paying LSE shareholders a premium worth more than the value creation on offer with Deutsche Boerse. ICE would need to take on more debt, having promised to de-lever, to fund such a bid. Its shareholders have tolerated this before.

Deutsche Boerse has set the benchmark for any bids. It's now up to ICE to show it can offer substantially more.

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

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