Deutsche Boerse-LSE Deal May Get Boost From European Markets LawBy
EU blocked previous merger on fears rivals would be shut out
Clearinghouses must give rivals access under new EU rules
The European Union scuttled Deutsche Boerse AG’s plan to join forces with NYSE Euronext, in 2012 amid concerns the tie-up would enjoy a near-monopoly in derivatives and could shut out rivals to the clearing market.
Four years later, a lot has changed -- increasing Deutsche Boerse’s chances of winning the EU’s blessing for another mega-deal, this time with London Stock Exchange Group Plc, according to analysts and competition lawyers.
The biggest change is the emergence of new EU rules slated to take effect at the start of 2018 that will require clearinghouses to allow open access to rivals in an attempt to enhance competition -- potentially neutralizing some of the antitrust concerns that thwarted Deutsche Boerse’s tie-up with NYSE Euronext.
"The market context and the regulatory framework have both shifted and that seems pivotal here and helps in favor of securing a positive outcome” from the European Commission in Brussels, said Bruce Kilpatrick, a competition lawyer at Addleshaw Goddard in London.
Amid growing angst over “Brexit” -- the U.K.’s possible departure from the EU -- the LSE said Tuesday it was in merger talks with Deutsche Boerse, a move that would create a dominant European Exchange operator. The proposed merger reflects the inexorable consolidation that has created a handful of titans overseeing much of the plumbing for global trading. That consolidation will pique the interest of EU Competition Commissioner Margrethe Vestager if they agree on terms to create a $28 billion company.
Lawyers and former EU officials say the pre-notification phase of the plan, where the companies and regulators talk informally about how to smooth the way for approval, could be drawn out and there’s little chance it would be approved by the commission without a protracted phase II investigation lasting about four months.
Still, Vestager will probably give the deal clearance following a phase II probe, according to Kilpatrick. Commission approval "will be a big speed bump," but a deal is possible with a few divestments, said Peter Thorne, an analyst at Edison Investment Research.
Though previous deals predate Vestager, the Brussels-based commission, which declined to comment on the proposed transaction, is well versed in probing exchange mergers.
In 2012, then-EU commissioner Joaquin Almunia singled out clearing, saying the combination would create “major barriers” to future rivals. He said customers prefer “to stay on exchanges where they can pool margin and thereby save collateral” and as a result “there is simply no prospect” of CME Group Inc. “or any other player” posing any real rivalry in the near future.
But the new EU rules known as MiFID II now require clearinghouses to allow “open access,” which in theory would enhance competition, eroding Deutsche Boerse’s closed model, according to analysts.
Regulators also may be warmer to Deutsche Boerse’s plans with LSE this time around, because the groups deal primarily with different kinds of derivatives, said Eric Compton, an analyst at Morningstar Inc.
"It’s not an automatic no, based on the commission’s previous statements on the NYSE and Deutsche Boerse merger," Compton said.
Even so, incoming CEO Carsten Kengeter faces a delicate balancing act deciding which approach to take when it comes to open access before MiFID comes into force. LSE has been a proponent of the open-access exchange that the regulations are designed to encourage. Deutsche Boerse’s so-called silo model is the opposite.
"The problem here is LSE is really the only one willing to go the open-access route and Deutsche Boerse is totally against it," said Jonathan Goslin, an analyst at Numis Securities. "If they go with LSE’s model that’s going to hit Deutsche Boerse’s profits."
— With assistance by Gaspard Sebag, and John Detrixhe
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