Is This the End for Europe

Frankfurt stock exchange operator Deutsche Boerse revealed Friday that in the proposed tie-up with the London Stock Exchange the merged group would be based in the British capital and be headed by a German.

But it warned that a potential “Brexit” — while not an actual hurdle to the merger — could nevertheless jeopardise the EU’s wider plans for a unified capital market.

“This transaction would be expected to fully optimise and benefit from the potential of the Capital Markets Union project,” Deutsche Boerse and the LSE said in a statement.

The capital markets union is a drive to build a single market for capital across the 28-member bloc.

But they added: “It is recognised that a decision by the United Kingdom electorate to leave the European Union (a ‘Leave Decision’) would put that (capital markets) project at risk.”

With regard to the proposed merger of Deutsche Boerse and the LSE, the German company insisted that the outcome of Britain’s referendum on EU membership “would not be a condition of the potential merger.”

– CEO to be a German –

Outlining the rationale and keynpoints behind the proposed merger, Deutsche Boerse said that its chief executive Carsten Kangeter would assume the role of CEO of the combined company if the tie-up goes ahead.

The tie-up plans constitute the third attempt at merging Europe’s two biggest markets, but it comes at a politically sensitive time as Britain is due to hold a referendum on June 23 which would determine whether it remains in the EU.

The London Stock Exchange and Deutsche Boerse had first announced they were in talks on February 23, just three days after British Prime Minister David Cameron secured a deal with the EU for reforms aimed at keeping the UK in the bloc.

The German exchange said “the potential merger would be structured as an all-share merger of equals under a new UK holding company”.

Under the terms of the deal, Deutsche Boerse shareholders would end up with 54.4 percent of the new holding company’s capital, and LSE shareholders with 45.6 percent. Both financial markets would continue doing business under their respective current brand names.

The LSE and Deutsche Boerse “would become intermediate subsidiaries of the combined group. The existing regulatory framework … would remain unchanged, subject to customary and final regulatory approvals.”

The combined group would alsobe listed on both the London and Frankfurt stock exchanges and its shares included in the blue-chip stock indices, EuroStoxx, DAX and FTSE.

It would have headquarters in London and Frankfurt and the board would have “equal representation” from both sides.

At completion, LSE chairman Donald Brydon would become chairman of the combined group.

Alongside CEO Kengeter, the LSE’s finance chief David Warren would be chief financial officer.

The LSE’s current CEO, Xavier Rolet, would step down.

In addition, a joint committee had been set up to advise on the implications of the outcome of Britain’s EU referendum, Deutsche Boerse said.

Most major British companies and multinationals based in the UK are opposed to a Brexit. And Edison Investment Research analyst Peter Thorne argued that since both the financial infrastructure business in which the stock exchanges operate was increasingly global, as was the regulatory environment, “it should be most unlikely that Brexit would remove the merits of the merger.”

Nevertheless, any possible British exit from the EU would be a political decision and the deal’s financial logic would not be the only concern, he cautioned.

– Third time lucky –

The latest project is the third attempt to combine the London and Frankfurt stock exchanges.

In 2000, similar plans were blocked by the LSE’s owners. And a second attempt in 2004 — when then rival Euronext had made a competing bid — the British hedge fund, The Children’s Investment Fund (TCI), also derailed the plans.

For its new proposal, Deutsche Boerse has until March 22 to launch the operation, pending shareholder approval and the green light from regulators.

The German stock market regulator said it was awaiting the full details of the plans before making any judgement.

Deutsche Boerse said that both sides believed that the potential merger would represent “a compelling opportunity for both companies to strengthen each other in an industry-defining combination, creating a leading European-based global markets infrastructure group.”

There would be “significant customer benefits” and “substantial” cost and revenue synergies, Deutsche Boerse argued.

In Frankfurt, investors appeared little impressed, however, with Deutsche Boerse shares underperforming the overall market, adding around one percent while the blue-chip DAX index gained more than two percent.

By contrast, in London, LSE shares were up 1.52 percent while the overall FTSE was up 1.29 percent.

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