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.

Brexit? What Brexit? Xavier Rolet, CEO of the London Stock Exchange, says the group's planned merger with Deutsche Boerse will be domiciled in the U.K. despite comments from the continent that it would be strange for Europe’s top stock exchange to live outside the EU. How can he be sure?

The reasoning might be that the U.K. will still be in the EU when the deal is scheduled to complete early next year. The Brits may not even have started the formal two-year exit process by then. Any German or European regulator demanding a domicile shift could be won round by assurances that the merged company would hold a shareholder vote on moving out of the U.K. if Brexit became a reality.

In fact, this looks like wishful thinking. The risk is still high that regulators insist on a Brexit-proof European structure from the get-go. If so, the current deal would fall apart as it cannot be simply amended to satisfy such demands. The present structure works by establishing a new U.K. domiciled company, which will buy out shareholders in both the LSE and Deutsche Boerse. To shift domicile, or establish a dual-country structure with an additional holding company based in another EU state, would mean negotiating a new deal, and putting this to LSE and Deutsche Boerse shareholders once again.

This in turn would open the possibility of resetting the financial terms of the deal to account for the post-Brexit world. Deutsche Boerse shareholders -- or activists flocking into the stock -- might argue the LSE has been weakened by the referendum result, so February's nil-premium terms are now too generous. LSE shareholders could argue for a so-called "control" premium because the center of gravity was shifting to the Deutsche Boerse side, especially if the domicile was in Frankfurt and the CEO role stayed, as envisaged now, with the German exchange.

Neither argument is a clincher right now. London-listed stocks with sensitivity to U.K. share trading, such as Schroders and Hargreaves Lansdown, are actually up since February. On Friday, the LSE even traded above the implied terms of the offer relative to Deutsche Boerse. Changing domicile doesn't tilt the economics of the deal in the favor of one side or another.

Rocky Road
LSE shares are again showing some sympathy for the Deutsche Boerse merger terms
Source: Bloomberg

The real difficulty would be perception, politics and delay. A deal structured as a German takeover of a totemic symbol of U.K. finance might be harder for Theresa May's government to welcome than the post-Brexit takeover of ARM Holdings. And rejigging things might make it easier for an interloper to crash the party.

Against this backdrop, the dealmakers still hold one useful card: the name of the new company. For now, they haven't moved beyond the working title of "U.K. TopCo" -- the legal name for the British holding entity. The less region-specific this is, the less chance of the merger becoming a political football. The British Airways-Iberia merger provides a good model: "International Consolidated Airlines Group." That's a name boring enough to put patriots to sleep, while most people in the U.K. still merrily call it BA anyway. "International Markets Group" would be dull but safe too -- and the Brits and Germans could just carry on calling it the LSE or Deutsche Boerse, whatever floats their boat.

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:
James Boxell at jboxell@bloomberg.net