Brexit, Headquarters Key in German Regulator Review of LSE Deal

  • ‘In our interest’ to have ‘strong European players’: Al-Wazir
  • As exchange regulator, Hesse holds veto powers over deal

In its review of the merger between Deutsche Boerse AG and London Stock Exchange Group Plc, the regulator of the Frankfurt bourse will pay close attention to the U.K.’s referendum on European Union membership and the location of the future headquarters of the combined company, the economy minister of the German state of Hesse said.

“We must of course take such a result, regardless of the outcome, into account,” Tarek Al-Wazir said in an interview in Frankfurt on Thursday. He added that the appraisal by Hesse will last long after the June 23 vote date. “I don’t wish to speculate. But it’s true to say that of course a decision in a situation that harbors uncertainty is of particular relevance for us.” The outcome “doesn’t alter the legal parameters that we have before us,” he said.

Tarek al-Wazir

Photographer: Michael Gottschalk/Photothek via Getty Images

The two exchanges plan to create a holding company, based in London, under which they’ll operate. While Deutsche Boerse Chief Executive Officer Carsten Kengeter would take the helm at the new entity and the German exchange’s 54 percent stake would make it the larger partner in the combination, London as the base is a sticking point for local opponents to the deal, especially if the U.K. were to leave the EU. As the regulator of the Frankfurt Stock Exchange and the Eurex derivatives exchange, Hesse holds veto powers on the deal.

London Questioned

“Of course we will have to pose the question, where will the owner of the parent company of the Frankfurt Stock Exchange and Eurex be based?” Al-Wazir said. “We only hope the question of how things will develop in a post-Brexit scenario simply doesn’t arise.”

The exchange operator has a public duty to ensure the development of the marketplace in Frankfurt, and Hesse will have to review whether that will be possible “under the construct that is on the table,” Al-Wazir said.

While not advocating a U.K. exit from the EU, he said Frankfurt would benefit in such a scenario. Real-estate brokers in the region are currently fielding a swathe of inquiries from London-based firms about available office space, he said.

“There would be an advantage, that’s clear, because many of those in London’s financial center who benefit from having an EU passport will naturally think about where it all goes from there,” he said. “Many players have a Plan B. Nonetheless, I’m in favor of Great Britain staying in the EU because otherwise Europe loses as a whole.”

German Economy

Kengeter embarked on the deal despite the uncertainty about Britain’s future in the EU to preempt a potential U.S. suitor from pouncing on LSE. The rationale for building a European exchange powerhouse to act as a counterweight to U.S. operators remains, regardless of the U.K.’s decision, the CEO said on May 4.

Hesse “naturally has an interest in having strong European players on the global market,” Al-Wazir said. “It’s also clear that Deutsche Boerse has said that it wants to steer the future, and be at the forefront technologically. This is independent of who you work with or whether you have growth through mergers or smaller acquisitions.”

Two failed attempts by Deutsche Boerse to acquire LSE in the past won’t have a bearing on Hesse’s decision this time around, Al-Wazir said.

“Even if twice in the past the promises made turned out to be unviable, you still have to examine on the third occasion whether this time it could be right,” the minister said. “The burning question is whether gradual progress can come through smaller mergers or whether it has to be a big bang. But it’s clear that at the end of the day you need ideas about how to stay ahead in the competition.”

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