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.

The pressure is building on Intercontinental Exchange to try to break up the London Stock Exchange's merger with Deutsche Boerse. Investors don't see it that way.

LSE shares have underperformed the market since Feb. 29, the day before ICE said it was considering an offer. If investors believed ICE was going to make a generous offer to wrest LSE from its German rival, the stock would have outperformed.

LSE Underperforms
Exchanges's shares have trailed the market - despite ICE's declared takeover interest
Source: Bloomberg

Buying LSE would be a huge tactical and financial challenge for ICE -- but it has to have a go. A counterbid is getting harder: the LSE's standalone value has risen, and a positive update on first-quarter sales this week could push that figure higher.

The shares closed at 23.13 pounds on Feb. 22, just before talks with Deutsche Boerse leaked. Since then, LSE posted a good set of earnings, prompting analysts to upgrade their estimates. In theory, that would have restored the stock to its three-month average of about 25 pounds. Adjust for the 4 percent rise in the FTSE 350 index over the same period, and a solo LSE could be valued at just over 26 pounds a share, or 9.1 billion pounds.

Bid Interest
Exchange's stock has slipped as hopes of a counter-offer from ICE receded
Source: Bloomberg

Assume ICE pays the 30 percent premium shareholders typically demand for giving up control of a company, and the take-out price would be about 34 pounds a share, or 12 billion pounds.

ICE could afford that 2.9 billion-pound premium -- just. After all, the LSE and Deutsche Boerse say that within three years they would save 350 million pounds from merging. These savings have a net present value of 3.3 billion pounds, factoring in tax and one-time costs. They are ambitious and may include savings that ICE wouldn't be able to wring from LSE. Still, it's not unreasonable to expect that ICE could achieve 90 percent of the savings Deutsche Boerse and LSE say they can create. That would imply 2.9 billion pounds of value creation -- neatly covering the takeover premium.

Factoring in assumed debt and one-time costs, the deal would cost 13.8 billion pounds. But it would add about 990 million pounds of net income to ICE's bottom line in its third year, based on LSE's forecast operating profit and the full delivery of cost savings. So the return on acquisition would be a tolerable 7 percent, roughly in line with the LSE's cost of capital.

ICE could afford to pay one-third -- $6.3 billion -- in cash, the same proportion it paid when buying NYSE Euronext in 2013. ICE is currently highly leveraged at 2.8 times Ebitda. But it could pay down debt while the deal went through regulatory approval -- which could take a year. Assume it pays off $2 billion by then and the net debt position at point of acquisition would be $11.7 billion, three times ICE and LSE's combined $3.9 billion Ebitda forecast for this year -- high, but tolerable.

ICE could also sell parts of LSE it doesn't want -- such as Borsa Italiana or the French clearing house. But that adds complexity.

The snag is that a cash and stock offer of as much as 35 pounds might still not be enough to persuade the LSE board to switch their loyalty from Deutsche Boerse.

LSE shareholders stand to enjoy 46 percent of the value created by the Deutsche Boerse merger. Xavier Rolet, CEO of the British exchange, may argue the Deutsche Boerse merger is worth even more. He's been pretty rude about ICE, dismissing them as a slash-and-burn interloper in an interview with the Telegraph.

Even if it strained every sinew, ICE would have a fight on its hands and would need to appeal directly to LSE shareholders, hoping the LSE board would buckle.

All in all, it's difficult and expensive, with no immediate financial payback. So why bother? The answer is that ICE has little choice if it wants to avoid losing its status as the world's biggest exchange by revenue to a merged LSE-Deutsche Boerse.

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

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

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