LSE-Deutsche Börse deal said to be at risk because of Brexit
The London Stock Exchange Group’s planned $20bn merger with Deutsche Börse is at risk of collapse after the UK’s decision to leave the EU dramatically reframed the terms of the deal, according to two advisers familiar with the talks.
Executives on both sides fear the UK vote will put overwhelming pressure on German watchdogs to block the deal because the combined company will be based in London, according to the people.
“This deal is dead. The Germans won’t allow it,” said one disconsolate backer of the transaction.
However, both companies said on Friday they were committed to the deal’s agreed and binding terms, irrespective of the vote. The outcome did not affect the “compelling strategic rationale” of their deal, they said in a joint statement.
A combination of Europe’s two largest exchange operators by market capitalisation would create a derivatives and securities trading powerhouse able to take on the world’s largest markets operators.
Investors’ uncertainty over the deal’s future helped push LSE shares down 8.5 per cent to £24.98, while Deutsche Börse shares dropped 5.1 per cent. Analysts also noted the deal’s valuation had changed because the LSE reports earnings in sterling, which lost about 10 per cent in value overnight.
Under the all-share deal, LSE shareholders would own 45.6 per cent of the combined group while Deutsche Börse shareholders would own 54.4 per cent.
In spite of efforts to press on with the deal, politicians in Germany have frequently expressed concern that oversight of part of their critical market infrastructure could be headquartered outside the EU.
People close to Deutsche Börse insisted the deal was not in danger, while conceding that there would be another round of hurdles to overcome.
Chief among them is likely to be European Central Bank’s demands that the future clearing of euro-denominated derivatives transactions takes place inside the EU. That would entail routing trades through Frankfurt, rather than London, which could unbalance the delicate power-sharing agreement.
The regional government of Hessen is also expected to redouble efforts to wrest influence away from London, which is proposed as the location of the merged group’s headquarters.
Its economics minister Tarek Al-Wazir was quick to zero in on the implications of the UK’s vote for the transaction.
“We are looking at all aspects of the stock exchange transaction . . . When a new aspect appears, then we will also look at this aspect carefully as well,” he said in a brief interview posted on his Facebook page.
“Of course, there are now a couple more questions — such as the possibility of carrying out our supervisory duties, depending on where the headquarters is. We will now look at precisely these questions in an orderly and scrupulous manner, and without hurry,” he wrote.
Carsten Kengeter, Deutsche Börse chief executive and Xavier Rolet, his opposite number at the LSE, spoke to each other in a lengthy, early morning phone call on Friday. They remain “absolutely committed to this transaction”, according to one person briefed on the call.
Joachim Faber, Deutsche Börse’s supervisory board chairman, will lead a six-person referendum committee drawn from the boards of both companies, to work through the challenges, starting next month.
LSE shareholders are due to vote on the deal on July 4. Owing to the structure of the deal and local regulations, Deutsche Börse will not hold a shareholder meeting but make a tender offer for shareholders that closes on July 12.
“The decision of the UK to leave the EU makes it ever more important to maintain and foster ties between the UK and Europe,” said Mr Faber in a statement on Friday.