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Crock exchange

22 June 2016 By George Hay

The planned 20 billion-plus pound merger between the London Stock Exchange and Deutsche Boerse is hanging over a precipice. Britons will decide on June 23 whether they want to stay in the European Union. For sceptical Deutsche Boerse shareholders, a vote to leave – which is perfectly possible – could be the final straw.

Some Deutsche Boerse stakeholders already have the hump. On June 7 the Deutsche Boerse works council disputed the idea that LSE-Deutsche was a merger of equals, saying that important decisions would be taken in London. A suddenly less valuable LSE could fan these flames.

Under the terms of the deal announced on Feb. 23, LSE shareholders get 45.6 percent of the combined company – roughly equating to what they should have got based on the three-month average of the two companies’ share prices. Awkwardly, a last-minute movement of the share prices meant that on the day before LSE only warranted 42 percent, meaning that the deal could be portrayed as offering a control premium, rather than a true merger of equals.

Brexit could exacerbate the disparity between what LSE is being offered and what the market says it is worth. Right now, LSE’s market value implies it should only receive 44 percent of the company. Imagine a UK exit means that its shares fall roughly 10 percent to around 24 pounds, and the pound depreciates 10 percent against the euro. LSE’s share of the two companies would fall slightly below 40 percent.

An oscillating share price doesn’t automatically kill the deal. The two companies themselves insist that the strategic rationale is not dependent on Britain being part of the EU. Any dips in the LSE share price may be temporary, and Deutsche Boerse shares could fall as well – the two groups’ share prices have recently moved in step.

But for LSE-Deutsche to succeed post-Brexit, it will have to survive the UK renegotiating its relationship with its main regulators, as well as national rivalries. If the financials move against a deal as well, the tensions may become too great.

 

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