NYSE Owner ICE, CME Group Mulling Bids for LSE 

LSE already in advanced talks with Deutsche Börse about merger

Intercontinental Exchange Inc. and CME Group Inc. are considering bids for London Stock Exchange Group PLC, potentially gate-crashing the British company’s proposed merger with Deutsche Börse AG.

ICE, the owner of the New York Stock Exchange, said in a statement Tuesday that it was studying a bid for LSE but had yet to make a decision and hadn’t made any approach to the British company.

CME, the operator of the Chicago Mercantile Exchange, is also considering an approach for LSE, according to a person familiar with the matter.

The news comes a week after LSE said it was in advanced talks with Deutsche Börse about a so-called merger of equals that would value the combined company at about $28 billion based on their closing stock prices the day before the announcement.

A bid from either ICE or CME would be one way to stop the formation of a leading European exchange that could pose a formidable threat to the two leading U.S. exchanges.

A bidding war could be a problem for Deutsche Börse, and potentially hinder any deal.

“The price that Deutsche Börse will have to pay for LSE will likely go up,” said Richard Repetto, an analyst for Sandler O’Neill + Partners LP.

The person familiar with the talks said that both ICE and CME, should they go ahead, would likely place all-cash offers for LSE because both have substantial financial firepower. That could put either of them in the pole position because investors typically prefer cash over a stake in a combined entity.

A spokeswoman for CME declined to comment. ICE declined to comment beyond its statement.

Two people familiar with Deutsche Börse’s plan said improving the terms for LSE could be tough for the German company because the terms are already favorable for LSE investors.

A 2005 takeover bid for LSE by Deutsche Börse was hurt in part because of a rival bidder, noted Citigroup Inc. analysts in a report released Tuesday. Deutsche Börse’s balance sheet is already stretched, and a renegotiation might mean a higher proportion of the combined equity going to LSE or the need for Deutsche Börse to raise equity, the report said.

Deutsche Börse and LSE alone aren’t big or diverse enough to truly challenge their U.S. rivals. But together they could control not just stock markets but derivative markets as well, which include instruments such as futures and options that command higher margins and are harder for rivals to replicate. A deal would give LSE a large derivatives trading business, while Deutsche Börse would gain a leading cash equities market and clearing and settlement business from LSE.

LSE shares rose 7% on Tuesday in response to a potential bidding war for the company. Deutsche Börse gained 0.9%.

The biggest challenge facing ICE or CME, analysts say, is the regulatory environment. CME and ICE, the largest and second-largest exchanges in the world by revenue, could be thwarted by regulators if they attempted to take over the fourth-largest exchange by revenue, LSE, according to Burton-Taylor International Consulting LLC.

“Any participant entering the game can anticipate substantial scrutiny and attention from authorities,” said Steve Woodyatt, chief executive of Object Trading, a market-access provider.

The exchange industry has a history of failed attempts at consolidation. Deals have been struck again and again, only to unravel because of shareholder resistance or antitrust concerns. LSE and Deutsche Börse, for example, have been in on-again, off-again talks since at least 2000. Deutsche Börse also held talks with Euronext, which was ultimately bought by the New York Stock Exchange. When NYSE Euronext then tried to do a deal with Deutsche Börse, regulators shot it down over fear of creating a monopoly.

In addition to Deutsche Börse, other bidders for LSE have included OM Gruppen in 2000,Macquarie Bank Ltd. in 2005, Nasdaq Inc. in 2006 and Canadian exchange operator TMX Group in 2011.

LSE said it noted ICE’s announcement and confirmed it hasn’t received any proposal from the company, adding that talks with Deutsche Börse continue to progress.

Deutsche Börse also said it noted ICE’s statement and would closely monitor future developments, while talks with LSE continue.

While CME hasn’t yet decided whether to proceed with a bid, it appears to have more financial firepower and fewer antitrust issues than ICE because of less overlap among businesses, the person familiar with the situation said.

LSE remains committed to a friendly deal with Deutsche Börse but it would have to consider potential rival bids by ICE or CME, the person added.

Talks between Deutsche Börse and LSE represent at least the third attempt by the companies to combine.

The deal would create the largest exchange in Europe. The companies said Friday the combined group would be domiciled in London with head offices in both London and Frankfurt.

ICE has until 1600 GMT on March 29 to either make an offer or withdraw under U.K. takeover rules. The deadline for LSE and Deutsche Börse to reach an agreement on a merger is 1700 GMT on March 22.

Source: WSJ

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