Exchange Mergers

Left on the Shelf

The London market's defenses are weak. Don't expect them to be tested soon.
At Closing, April 23rd
4215.00 GBp
As of 3:30 PM EDT
110.95 EUR

Investors are hoping it won't be long before London Stock Exchange Group Plc gets sucked into another big deal.

The stock shot up almost 4 percent on Wednesday after European Union regulators formally blocked a planned combination with Deutsche Boerse AG.

Hope Springs Eternal

Shares in LSE rallied after its merger with Deutsche Boerse was blocked

Source: Bloomberg

Intraday times are displayed in ET.

The British exchange is certainly vulnerable. But it's hard to see why potential buyers such as Intercontinental Exchange Inc. or CME Group Inc. would be in a hurry.

ICE considered a move on the LSE after the planned Deutsche Boerse merger surfaced in February 2016. A counterbid would have prevented ICE from being eclipsed by the proposed Anglo-German market. That motive is now irrelevant.

The logic today would be an opportunistic bid to gain scale. The LSE's defenses are weak. Xavier Rolet, CEO for nearly eight years, had been planning to leave following the merger. He's now working in what should have been his retirement.

A deal would be a stretch financially. An offer from ICE at say, 37 pounds per LSE share -- a 21 percent premium to LSE's three-month average price -- would cost 13.8 billion pounds ($17 billion), including assumed debt.

ICE might just be able to fund a third of that in cash without pushing leverage to an uncomfortable level. It would need comparable synergies to Deutsche Boerse to make a deal deliver adequate returns in the near term. All in all, not easy.

The bigger obstacles are politics and regulation. An Anglo-American deal might be an easier sell in Britain, where it would create a transatlantic trading giant to challenge Europe. It could be seen as a boost to London as a financial center in the wake of Brexit.

Still, it's just as easy to imagine such a proposal getting bogged down in squabbling between financial supervisors. On antitrust, the failure of the tie-up with Deutsche Boerse reinforces the impression that trust-busters really don't like exchange deals at all. The killer regulatory objection, concentration in bond clearing, was a last-minute surprise. What's more, it looks increasingly difficult to win approval using so-called behavioral remedies -- where bidders promise to be good, rather than actually sell assets.

Then there is the uncertainty around Brexit. It would surely be wiser for a bidder to wait and see how things develop.

That leaves the LSE and Deutsche Boerse having to renew their standalone stories. The LSE has announced a 200 million-pound share buyback. Its course now will probably involve cost-cutting, some bolt-on deals and further returns of capital.

Both companies need to resolve uncertainty over their leadership. Deutsche Boerse CEO Carsten Kengeter remains mired in an insider trading probe, while Rolet isn't a credible long-term leader.

The London market's defenses may be weak right now. But don't expect them to be tested in a hurry.

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

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    Chris Hughes in London at

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