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.

(Corrected )

London Stock Exchange shareholders are starting to doubt whether there will be an auction for company that sends their stock soaring. They may be being too nervous.

LSE shares hit 29.22 pounds ($41.30) on March 3 amid speculation that U.S. rival Intercontinental Exchange would trump a nil-premium merger proposal from Germany's Deutsche Boerse. Today, LSE trades at 28.20 pounds, while the FTSE 100 index is virtually unchanged.

Merger Doldrums
LSE shares have slipped since Deutsche Boerse confirmed its merger proposal
Source: Bloomberg data

Before the LSE's talks with Deutsche Boerse leaked in February, its shares were trading at about 25 pounds. The 3.2-pound premium in today's price is the result of three drivers: First, the upside from the now-formalized Deutsche Boerse deal, discounted for the time value of money. Second, the additional upside from the chance of an ICE counter-bid. And finally, a few pennies discount for the risk that regulators block all deals.

In today's money, the benefits of the Deutsche Boerse tie-up are worth slightly less than 4 pounds per LSE share. Intuitively, the odds of regulatory approval should be more than 50 percent unless the management teams have read the tea leaves wrongly. That means there is hardly anything in the LSE share price now that suggests a counter-bid -- let alone an auction.

Frankfurt's Fall
Deutsche Boerse has underperformed its benchmark since talks with LSE became public

That skepticism has some logic to it. For starters, Deutsche Boerse CEO Carsten Kengeter is under investor pressure not to sweeten the terms in the LSE's favour. The German exchange's stock has fallen 3 percent since the tie-up plans became public.

Meanwhile, ICE now seems to have an another option, thanks to IHS's agreement to purchase Markit, a data provider.

For ICE, Markit would complement Interactive Data Holdings, a bond-pricing service it acquired last year. The political and antitrust risks would be negligible compared to buying the LSE. At $5.9 billion, Markit would also be a more manageable transaction than the LSE, which has a market value of 9.8 billion pounds. (Markit and Interactive Data both compete with Bloomberg in selling information and data to the financial industry).

To cap it all, the LSE would demand a big premium to give full control to ICE. A 40 percent premium would imply a bid at 35 pounds a share. Constrained by its debt-laden balance sheet, ICE may simply be unable to afford that.

Where might the market be wrong?

ICE could still view the LSE as its biggest strategic prize, and make a hostile offer to shareholders directly, bypassing the board. This wouldn't have to include a big premium -- ICE would only have to beat Deutsche Boerse's 4-pound boost, and could offer some cash to boot.

The LSE would surely fight this furiously, and it would be a highly risky tactic for ICE, given this is a regulated industry.

But merger-arbitrageurs that have so far shunned this deal could be tempted to swarm onto the LSE register to flip the company to ICE. It was just this scenario that forced Cadbury Schweppes to surrender to Kraft in 2010 -- allowing the British company to extract a fantastic price along the way.

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

(Corrects to remove reference in sixth paragraph to Markit's stock gain implying investor expectations of another bid.)

To contact the author of this story:
Chris Hughes in London at

To contact the editor responsible for this story:
Edward Evans at