Hedge Funds Juicing LSE Ignore Graveyard of Failed Offersby and
LSE price signals traders expect higher bids from rivals
`Brexit,' regulation may be underestimated, analysts say
Traders bidding up the price of London Stock Exchange Group Plc are signaling this acquisition attempt might be different.
Euphoria over a potential bidding war is trumping -- for now at least -- the long list of past failed takeover attempts for the British company. Hedge funds have sent LSE beyond what Deutsche Boerse AG has agreed to pay in a friendly merger under discussion between the two. They’re acting on the possibility that rival suitors -- including U.S. peers Intercontinental Exchange Inc. and CME Group Inc. -- may bid as well.
“For now, it’s the greed factor, not the fear factor,” said Sachin Shah, a special-situations and merger-arbitrage strategist at Albert Fried & Co. in in New York. “Many of these people are sophisticated and smart, but they’re caught up in the bidding war. It could be anything but smooth sailing.”
Deutsche Boerse’s two other attempts to merge with LSE fell apart, once in 2005 because of shareholder opposition, and once in 2000, when the London exchange was focused on repelling a hostile takeover. Nasdaq Inc. and Macquarie Group Ltd. also tried, and failed, to buy LSE. The Australian firm abandoned its bid in 2006 after it got rejected, while Nasdaq was rebuffed twice, later in 2006 and in 2007.
The deal with Deutsche Boerse, announced Feb. 23, would create Europe’s biggest exchange in a combined business worth more than 20 billion pounds ($28 billion). The European Union scuttled Deutsche Boerse’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. While the regulatory backdrop is more favorable now, lawyers and former officials have said they see little chance a deal would win approval from European authorities without a protracted investigation lasting about four months.
Then there’s the U.K.’s potential exit from the EU, a minefield of uncertainty that Deutsche Boerse probably hoped, mistakenly, would scare off other bidders, said Shah. The companies’ boards have created a committee to advise on the ramifications of a “Brexit,” though they say the deal will proceed regardless of how Britons vote on June 23.
Representatives at LSE and Deutsche Boerse declined to comment on the arbitrage trading. Shares of both companies slipped on Monday.
The higher the stock goes, the higher the risk for arbitrageurs, who play the spread between deal and share prices. While LSE already reached a record last week, some see it going even further. In a Bloomberg survey, 23 event-driven traders and analysts said the shares could reach as much as 3,203 pence should another bidder emerge -- a 12 percent jump from Friday’s closing price.
Intercontinental Exchange, or ICE, said on March 1 that it’s exploring an offer for LSE, and the U.S. exchange estimates a higher offer than Deutsche Boerse’s could convince shareholders, people familiar with the matter said. CME is also working with advisers to assess whether it could challenge the deal, separate people have said.
“There is a lot of expectation priced in now,” said Ben Kelly, an event-driven analyst at Louis Capital Markets in London. “If ICE or CME come in, they will be expected to pay a proper premium.”
To some merger arbs, whether or not the deal is completed is less important than that they’re betting on it.
“It’s probably more complex than some of the deals I’ve come across, even setting aside the issue of a counterbidder,” said Steve Schlemmer, who specializes in European merger arbitrage at Churchill Capital UK Ltd. in London. “We have the regulatory issue, how does a clearing company work, who gets to own it -- these are heavily politicized, regulated businesses.”
That said, for now at least, Schlemmer says he ranks himself among the LSE bulls.
“There’s a lot of opportunity here,” he said. “Are we positive this deal will close? Not at all. Is there a way to make money on it in the short term? Yes. That’s why we’re in it.”