Deals

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 and Deutsche Boerse are working hard to remove any temptation shareholders and competitors might have to prevent their proposed merger.

When the two agreed to combine back in March, the main attraction was the prospect of 450 million euros ($503 million) of annual pretax cost savings. That at least gave shareholders some compensation for the fact neither side would get any premium for their shares.

Now the betrothed have found still more financial benefits -- combined annual revenue will be 250 million euros more thanks to the merger, they said on Wednesday -- although these will take five years to materialize.

Moving Closer
LSE shares have converged with merger partner Deutsche Boerse amid dwindling hopes of a counterbid

It's another incentive for shareholders to support the deal, rather than wait for something better to come along. The approval process is organized to conclude after the U.K. votes on whether to remain a member of the European Union. That poll may change the calculus, but as things stand the merger still looks like a better bet for each side's investors than staying independent.

Shareholders -- the LSE's in particular -- would doubtless prefer to receive a full premium in a clean takeover. But it would be highly risky for them to vote against the deal in the hope that the obvious suitor, Intercontinental Exchange of the U.S., resurfaces in November, the earliest regulators will allow it to look again at a bid after it stopped work on one last month.

ICE's decision to put its pen down perhaps suggests it doubts the benefits of buying more scale in another exchange deal, or that it is more interested in doing more transactions in the data and information business.

Besides, the deal isn't done until a U.K. court rubber stamps it following regulatory approval. LSE shareholders could, in theory, appeal to a judge to pass on that if another bid turned up late in the day -- although that would be a long shot.

Incremental Value
LSE and Deutsche Boerse say merging would add revenues as well as save on costs
Source: London Stock Exchange, Deutsche Boerse

In the meantime, the bar for a counterbid has been raised again. Investors may be rightly sceptical of revenue gains, but if the groups can achieve what they are promising, the added benefits would contribute another 100 million euros to annual operating profit (assuming a 40 percent operating margin). Taxed, these have a net present value of about 1.1 billion euros. Add 4 billion euros of value created by the cost savings, and the combination starts to look more attractive.

But it's not certain these gains will be achieved in full. Shares of both companies are pricing in only a fraction of the benefits right now, reflecting concern regulators could yet sink the transaction. Still, it's the only deal on offer -- and one that beats being left out in the cold.

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 chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net