LSE Investors to Vote on Deal Ensnared by Post-Brexit Politics

  • Companies may need to explore options to get regulator nod
  • Brexit has made clearing, headquarters, politics more complex

London Stock Exchange Group Plc shareholders’ vote Monday on whether to approve the acquisition by Deutsche Boerse AG may be the easiest hurdle the two exchange operators face in coming months.

The $14.3 billion deal, among the biggest pending all-European takeovers, is expected to win over LSE investors as they meet in London on Monday at 10 a.m. Even after Britain’s shock decision to leave the European Union, major stock holders continue to see the deal’s logic, according to people familiar with discussions who asked not to be named citing confidentiality. The deal would create a European mega-exchange that can better compete with giants in the U.S. and Asia.

Still, the toughest barriers are yet to come. Deutsche Boerse investors have until July 12 to tender their shares, and German leaders are bristling at the holding company’s planned headquarters in London. Basing Germany’s valuable exchange and clearing companies outside of the European Union has become a particularly tough sell after the Brexit decision.

Separate people familiar with the matter say Deutsche Boerse and LSE will need to explore options including moving the combined company’s location outside of the U.K. to obtain approval from German and European regulators.

Headquarters

Options could include moving the holding company from London to a different location within the EU, like the Netherlands, said the people. Such a move would come only after LSE shareholders approve the existing merger plan, the subsequent German tender offer succeeds and the deal is completed, they said.

The terms of the deal are binding and remain unchanged, representatives from both companies said.

The tie-up could be even more important with Britain leaving the EU, as the union between London- and Frankfurt-based firms may be able to lubricate capital flows between the region’s financial centers. The companies’ boards have maintained that the takeover makes sense regardless of the Brexit decision.

Political Football

The companies also face Brexit fallout because their clearinghouses --  firewalls that hold collateral from buyers and sellers in case one of them defaults -- have become a political football. French President Francois Hollande has said euro clearing should come back to the common-currency area. German officials have also said it makes the most sense for clearing, a core component of the merger, to be based in Frankfurt.

Much of London’s euro clearing for derivatives happen at LCH. The company is majority owned by LSE and has cleared $346 trillion of swaps derivatives this year. About $112 trillion is denominated in euros. Deutsche Boerse’s Eurex division clears about 17 trillion euros ($18.9 trillion) every month.

This is at least the third time that the German exchange group has sought to buy LSE since the turn of the century. Antitrust concerns have killed previous industry merger attempts, which are yet to be surmounted in this effort.

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