What next for LSE and Deutsche Börse if the deal fails

The London Stock Exchange Group’s tie-up with German counterpart Deutsche Börse is hanging in the balance following the referendum vote. After speaking to executives across the industry, here’s an FN guide to what might transpire if the deal does hit the rocks…

A new deal

The Brexit vote will have heightened concerns held by German regulators about the combined group’s holding company being in the UK: that HQ would sit outside the EU once the UK negotiates the terms of its exit. Furthermore, the depreciation of the pound since June 24 makes the proposed ‘merger of equals’ tie-up look much worse for Deutsche Börse’s shareholders.

The two exchanges expressed their full commitment to the deal on June 24, but they will almost certainly be forced into restructuring the terms in some way, which may include moving the holding company to Germany, and even making Deutsche Börse the superior party in any transaction. However, what message would it send to the City of London in a post-Brexit haze if the LSE decided to be taken over by a Germany company?

ICE comes back to the table for the LSE

Any material change in the deal’s terms, or its collapse, are among the four scenarios outlined in Takeover Panel rules that would allow Intercontinental Exchange, which ruled out a possible bid for the LSE in May, to come back to the table.

That, of course, depends on ICE being willing to consider a second tilt. ICE chairman and chief executive Jeff Sprecher was highly frustrated by the LSE’s lack of engagement the first time around so he may be unwilling to come again.

And indeed ICE has other matters on its plate. It is dealing with an in-depth competition probe over its acquisition of Trayport, a software provider in the energy markets. It has also done other deals since, including acquiring a stake in Merscorp, a provider of US residential mortgage data.

Deutsche Börse comes into play

The deal’s potential collapse might make Deutsche Börse the exchange “in play” for counterbids. The most obvious candidate to bid for the German exchange remains the US futures giant CME Group.

The world’s largest exchange group by market capitalisation, CME has kept its cards close to its chest but if Deutsche Börse does come up for grabs it might view the situation as an opportunity to grow in Europe that is too good to miss.

The LSE forges a path alone

Under its chief executive Xavier Rolet, the LSE has done pretty well on its own over the past seven years, going from primarily a UK equity market to a global financial group that houses technology, clearing and data businesses across the globe. It has made plenty of acquisitions to help it on its way and it could take the opportunity to properly integrate those.

Brexit, however, may mean it would need to restructure its business, including shifting parts of its clearing house LCH into the eurozone.

Another challenge would be leadership. The LSE has a strong management bench, but it’s Rolet who has overseen the group’s transformation. He is due to leave after the Deutsche Börse tie-up is concluded and the LSE may well take this is an opportunity to bring in fresh leadership.

Rolet had kept options open after his departure but had said he wanted to take a long-overdue holiday with his wife. After Brexit, she may have to wait a while longer.

So long Europe, hello Hong Kong

The City may become more global after the referendum and the LSE may decide its future lies in linking with Asian rather than European counterparts. Singapore Exchange is one possibility, but a more likely partner is Hong Kong Exchanges and Clearing.

HKEx’s $ 2.2 billion acquisition of the London Metal Exchange in 2012 gave it a footprint in the UK. It could be keen to expand further, and a deal for the LSE would marry two vibrant listings businesses in Europe and Asia. The group’s post-trade business would be strong too. LCH, which recently secured regulatory approvals to operate in Singapore, would give HKEx a ready-made and highly-respected swaps clearing facility to its existing clearing operations.

However HKEx shareholders may be disappointed at a foray into lower-growth developed markets.

The LSE and Deutsche Börse declined to comment beyond their June 24 statement.

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